<PAGE>
Filed pursuant to Rule 424(b)(1)
File No. 333-93585
PROSPECTUS
9,300,000 Shares
[DIGITAS LOGO APPEARS HERE]
COMMON STOCK
----------------
Digitas Inc. is offering 6,200,000 shares of common stock and the selling
shareholders are offering 3,100,000 shares of common stock. This is our
initial public offering and no public market currently exists for our shares.
----------------
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "DTAS."
----------------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
----------------
PRICE $24 A SHARE
----------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Digitas Shareholders
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per
Share.... $24.00 $1.68 $22.32 $22.32
Total..... $223,200,000 $15,624,000 $138,384,000 $69,192,000
</TABLE>
Digitas Inc. and the selling shareholders have granted the underwriters the
right to purchase up to an additional 930,000 and 465,000 shares to cover
over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on March 16, 2000.
----------------
MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
March 13, 2000
<PAGE>
Inside Front Cover:
. Artwork containing words superimposed, including:
transform, trailblazing, speed, digital and Digitas
. Title reading as follows:
Digitas
A leader in bricks and clicks ebusiness transformation
. Text reading as follows:
The new digital economy goes beyond the Web. It's about leveraging
physical infrastructures and the Internet. Creating integrated end-to-
end solutions. And using these solutions to build customer
relationships.
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision.
DIGITAS INC.
Digitas is a leading Internet professional services firm. Our clients are
largely Fortune 100 and other industry leading companies. Our services are
interrelated and fall into three categories. The first category is Digital
Strategy, which helps clients define how the Internet and emerging technologies
can be used to create competitive advantages, improve market share and enhance
levels of profitability. The second category is Technology and Infrastructure,
which helps clients build Web sites, databases and linkages to call centers and
other customer contacts in order to implement their Digital Strategy. The third
category is Marketing, which helps clients communicate with current and
prospective customers directly via both on-line and off-line channels in order
to optimize the economic value of their customer bases. We employ approximately
1,240 professionals. We are headquartered in Boston, Massachusetts with offices
in New York City, San Francisco, Salt Lake City and London.
OUR MARKET OPPORTUNITY
The Internet is fundamentally changing the way consumers and businesses
interact. While many companies have built on-line storefronts, most still view
them as simply another independently operated channel for enabling transactions
and interacting with customers. This business model, however, prevents the new
on-line business from capitalizing on the power of the enterprise's existing
assets. To fully capture the potential of the Internet and maximize customer
value, companies must transform their businesses to a "bricks and clicks"
business model, in which their existing assets are integrated with a digital
strategy. This transformation is particularly challenging for large businesses
that have made significant investments in existing sales forces, marketing
strategies, brand names, supply chain management systems, distribution channels
and data management systems. However, it is also these companies that stand to
gain the most from a fully integrated business model.
To transform their businesses, companies are increasingly seeking assistance
from outside Internet professional services firms. However, at a time when
companies need a service provider to do more than build a Web site or enable
on-line transactions, we believe that few Internet professional services
providers have the depth of resources and range of services necessary to
address the large-scale engagements and demands of large companies such as
Fortune 100 companies on an on-going basis.
We believe there is a need for an innovative Internet professional services
provider, which has the scale, breadth of experience and expertise to help
companies understand and capitalize on the potential of the Internet as a part
of their overall business strategy and to leverage the power of their existing
assets to drive growth, maximize customer value and build a sustainable
competitive advantage.
3
<PAGE>
OUR SOLUTION
In redefining a client's business model, we draw on our comprehensive
Internet professional services capabilities and marketing experience to provide
a fully integrated, end-to-end solution with the following key elements:
Define digital business strategy. We work with members of our clients'
senior management to define new business strategies which are broad-based and
grounded in a thorough understanding of our clients' overall business and
competitive environment.
Create enterprise-wide customer value propositions. We employ a customer-
centric approach to develop new customer value propositions that enhance
customer loyalty and generate new business opportunities by taking advantage of
our clients' existing assets such as distribution channels, customer service
networks and customer information systems.
Build new technology and customer-facing infrastructure. We build new
technology and infrastructure for our clients, including Web sites that enhance
our clients' brands and electronic customer relationship management systems, or
eCRM systems, that are designed to manage customer relationships.
Implement solutions on enterprise-wide basis. We provide training,
organizational alignment and support to help our clients implement solutions
across their enterprises. We also coordinate the efforts of various client
businesses to create customer-oriented applications with a consistent corporate
message.
Develop integrated marketing plan. We design integrated marketing plans that
typically involve identifying customer segments, developing marketing
strategies and optimizing on-line media planning and channel allocation,
including mix, messaging and frequency.
Execute across marketing and service channels. We leverage our on-line media
buying, design and creative services and event sponsorships to market
seamlessly across multiple channels to help our clients build relationships
with their customers.
Performance measurement. Through every step of our solution, we measure the
value being delivered to our clients. We continually work with our clients to
determine the relevant metrics and our performance against those metrics. We
collect data frequently and use it to continually refine our solution and
maximize our clients' return on investment.
OTHER INFORMATION
The Holding Company Formation
Bronner Slosberg Humphrey Co. is a Massachusetts business trust which serves
as the ultimate parent of Digitas, LLC, the Delaware limited liability company
through which our business is operated. Immediately prior to the closing of
this offering pursuant to a reorganization transaction, Bronner Slosberg
Humphrey Co. will become a wholly owned subsidiary of Digitas Inc. and all
holders of outstanding equity interests in Bronner Slosberg Humphrey Co. will
become holders of equivalent equity interests of Digitas Inc. This offering
will be for shares of common stock of Digitas Inc.
Our principal executive offices are located at the Prudential Tower, 800
Boylston Street, Boston, Massachusetts 02199. Our telephone number at that
location is (617) 867-1000 and our Internet address is www.digitas-inc.com. We
have applied to register our trademark Digitas Inc. This prospectus also
contains the trademarks and trade names of other entities which are the
property of their owners. All information that we present in this prospectus
for any date or period gives effect to the formation of the new holding company
and the exchange of equity interests.
4
<PAGE>
THE OFFERING
Common stock offered by:
<TABLE>
<C> <S>
Digitas.......................................... 6,200,000 shares
Selling shareholders............................. 3,100,000 shares
Total........................................ 9,300,000 shares
Common stock to be outstanding after this offering.. 56,903,479 shares(1)
Use of proceeds..................................... To repay outstanding debt
and for general corporate
purposes, including
working capital,
expansion of our
operations and possible
acquisitions and
investments. See "Use of
Proceeds."
Nasdaq National Market symbol....................... DTAS
</TABLE>
- --------
(1) The number of shares of our common stock that will be outstanding after
this offering is based on 50,703,479 shares of common stock outstanding as
of December 31, 1999. It excludes:
. up to 930,000 shares of common stock to be issued by us pursuant to the
over-allotment option granted to the underwriters;
. 28,308,972 shares of common stock issuable upon exercise of stock
options outstanding as of December 31, 1999 at a weighted average
exercise price of $2.66 per share;
. 900,000 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 1999 at a weighted average exercise price
of $2.52 per share;
. 10,254,700 shares of common stock available for future grant under our
stock option plans as of December 31, 1999; and
. 2,200,000 shares of common stock reserved for purchase after this
offering under our employee stock purchase plan.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(in thousands, except per share data)
Effective January 1, 1999, the two companies through which we operated our
business were acquired by a private equity investor and several existing
shareholders. We refer to that transaction as the "recapitalization." These two
companies, which we refer to collectively as the "predecessor," were under
common control prior to the recapitalization, and their combined financial
information is presented for all periods before the recapitalization. Our
financial information for periods after the recapitalization reflects the
application of purchase accounting in connection with the recapitalization and
thus is not comparable to the financial information of the predecessor. Before
the recapitalization, the two predecessor companies were S corporations and
thus were not subject to federal income taxation. In addition, because the two
companies had different numbers of common shares outstanding that bear no
relationship to our current number of common shares outstanding, net income
(loss) per share has not been presented for periods before the
recapitalization.
The pro forma statement of operations data for 1998 give effect to the
recapitalization as if it had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Pro Forma
Predecessor (Combined) Predecessor (Combined) Company
--------------------------- ---------------------- ------------
Year Ended December 31,
---------------------------
Year Ended
Year Ended December 31,
1996 1997 1998 December 31, 1998 1999
------- -------- -------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Revenue................. $83,157 $101,238 $122,309 $122,309 $187,007
Operating expenses:
Professional services
costs................. 43,272 57,610 65,696 65,696 102,247
Selling, general and
administrative
expense............... 40,982 40,552 48,485 48,485 67,048
Stock-based
compensation.......... 628 6,325 25,820 5,690 10,743
Amortization of
intangible assets..... -- -- -- 36,688 36,688
------- -------- -------- -------- --------
Total operating
expenses.............. 84,882 104,487 140,001 156,559 216,726
Loss from operations.... (1,725) (3,249) (17,692) (34,250) (29,719)
Other expense, net...... (1,281) (2,431) (2,698) (6,548) (7,281)
Benefit from (provision
for) income taxes...... (160) 114 1,439 (4,047) (567)
------- -------- -------- -------- --------
Net loss................ $(3,166) $ (5,566) $(18,951) $(44,845) $(37,567)
======= ======== ======== ======== ========
Net loss per share:
Basic and diluted...... $ (0.74)
========
Weighted average shares
outstanding:
Basic and diluted...... 50,703
Pro forma net loss per
share:
Basic and diluted (1).. $ (0.57)
========
Pro forma weighted
average shares
outstanding:
Basic and diluted (1).. 53,772
</TABLE>
- --------
(1) The pro forma basic and diluted weighted average shares outstanding
includes the additional number of shares necessary to repay approximately
$68.5 of long-term debt at an offering price of $24.00 per share. The pro
forma basic and diluted net loss per share includes the elimination of
approximately $7.1 million of interest expense associated with the long-
term debt assuming the offering occurred on January 1, 1999 and the debt
was repaid.
<TABLE>
<CAPTION>
As of
December 31, 1999
--------------------
Actual As Adjusted
-------- -----------
Balance sheet data:
<S> <C> <C>
Cash and cash equivalents.................................. $ 441 $ 62,642
Total assets............................................... 252,889 315,090
Total long-term debt, less current portion................. 62,878 1,714
Shareholders' equity....................................... 119,836 255,244
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before purchasing our common stock. If any of the
following risks occur, our business, results of operations and financial
condition could be harmed. In that case, the trading price of our common stock
could decline, and you could lose all or part of your investment.
Risks Related to Our Business
The loss of even one significant client could have a material adverse
effect on our business, financial condition and results of operations
We derive a significant portion of our revenues from large-scale
engagements for a limited number of clients. Most of these relationships,
including those with our second and third largest clients, are terminable by
the client without penalty on 90 days prior written notice. Our relationship
with our largest client is terminable without prior notice. The loss of any
major client could dramatically reduce our revenues. For 1999, our three
largest clients, American Express, AT&T and General Motors, collectively
accounted for approximately 62% of our revenues, and our largest client,
General Motors, accounted for approximately 23% of our revenues. The loss of
any of these clients could significantly reduce our revenue and have a
negative impact on our operating results and reputation in our market.
Our failure to meet our clients' expectations could result in negative
publicity and losses and could subject us to liability for the services we
provide
The average dollar amount of our client engagements has grown significantly
while the time frame for delivering our services has generally decreased. As
clients have dedicated more money and resources to our engagements with them,
their expectations have also increased. As our client engagements become
larger and more complex and are required to be completed in a shorter time
frame, we face increased management challenges and greater risk of mistakes.
Many of the services we provide are critical to the operations of our clients'
businesses. Any failure on our part to deliver these services in accordance
with our clients' expectations could result in:
. delayed or lost client revenues;
. adverse client reactions;
. negative publicity;
. additional expenditures to correct the problem; and
. claims against us.
While our agreements with clients often limit our liability to damages
arising from our rendering of services, we cannot assure you that these
provisions will be enforceable in all instances or would otherwise protect us
from liability. Although we carry general liability insurance coverage, our
insurance may not cover all potential claims to which we are exposed or may
not be adequate to indemnify us for all liability that may be imposed.
If we are not successful in creating a worldwide network of offices, we may
jeopardize our relationships with existing clients and limit our ability to
attract new clients
Increasingly, our clients are insisting that their Internet professional
services providers be able to handle assignments on a worldwide basis. Failure
to have a worldwide network of offices may jeopardize our existing client
relationships and limit our ability to attract new clients. Our London office
may be able to serve Europe, the Middle East and Africa, but we will need to
establish regional offices for Asia and Latin America in the near future. We
also need to deepen and broaden our expertise in dealing with worldwide
assignments by hiring more senior executives with multi-national marketing and
Internet expertise.
7
<PAGE>
We need qualified professionals to grow our business, and they are in short
supply
Our future success depends in large part on our ability to retain, hire,
train and motivate qualified people. Skilled professionals are in short
supply, and competition for them is intense. As a result, we may be unable to
retain our qualified professionals to meet our existing business needs. In
addition, we may be unable to hire a sufficient number of qualified
professionals to meet our business plans. We may also have difficulty
attracting and hiring our desired number of qualified professionals after the
offering since some may perceive that the stock option component of their
compensation package is no longer as valuable. Moreover, even if we are able
to expand our employee base, the resources required to train and retain our
employees may adversely affect our operating margins. If we are unable to hire
and retain qualified professionals, we may be unable to complete work for our
existing clients or accept work from new clients.
We depend on our key personnel, and the loss of their services may
adversely affect our business
We believe that our success will depend on the continued employment of our
senior management team and other key personnel, including David Kenny,
Kathleen Biro, Robert Galford, Michael Goss, Marschall Smith and Michael Ward.
This dependence is particularly important to our business because personal
relationships are a critical element of obtaining and maintaining client
engagements. If one or more members of our senior management team or other key
personnel were unable or unwilling to continue in their present positions, our
business could be seriously harmed. In addition, if any of our key personnel
join a competitor or form a competing company, some of our clients might
choose to use the services of that competitor or those of a new company
instead of our own. Furthermore, other companies seeking to develop in-house
business capabilities may hire away some of our key personnel.
Fluctuations in our quarterly revenues and operating results may lead to
reduced prices for our stock
Our quarterly revenues and operating results are volatile. We believe that
period-to-period comparisons of our operating results are not necessarily
meaningful. These comparisons cannot be relied upon as indicators of future
performance. However, if our operating results in any future period fall below
the expectations of securities analysts and investors, the market price of our
securities would likely decline.
Factors that may cause our quarterly results to fluctuate in the future
include the following:
. variability in market demand for Internet professional services;
. timing and amount of client bonus payments;
. length of the sales cycle associated with our service offerings;
. unanticipated variations in the size, budget, number or progress toward
completion of our engagements;
. unanticipated termination of a major engagement, a client's decision not
to proceed with an engagement we anticipated or the completion or delay
during a quarter of several major client engagements;
. efficiency with which we utilize our employees, including our ability to
transition employees from completed engagements to new engagements;
. our ability to manage our operating costs, a large portion of which are
fixed in advance of any particular quarter;
. changes in pricing policies by us or our competitors;
. timing and cost of new office expansions;
. our ability to manage future growth; and
. costs of attracting and training skilled personnel.
Some of these factors are within our control while others are outside of our
control.
8
<PAGE>
Failure to manage our growth may impact our operating results
We expect to continue to rapidly grow our business. The expansion of our
business and customer base has placed, and will continue to place, increased
demands on our management, operating systems, internal controls and financial
and physical resources. If not managed effectively, these increased demands
may adversely affect the services we provide to our existing clients. In
addition, our personnel, systems, procedures and controls may be inadequate to
support our future operations. Consequently, in order to manage our growth
effectively, we may be required to increase expenditures to expand, train and
manage our employee base, improve our management, financial and information
systems and controls, or make other capital expenditures. Our results of
operations and financial condition could be harmed if we encounter
difficulties in effectively managing the budgeting, forecasting and other
process control issues presented by rapid expansion.
Our planned international operations may be expensive and may not succeed
We expect to expand our international operations. We have limited
experience in marketing, selling and supporting our services outside of North
America and the United Kingdom. Development of such skills may be more
difficult or take longer than we anticipate, especially due to language
barriers, cultural differences, currency exchange risks and the fact that the
Internet infrastructure in foreign countries may be less advanced than in the
United States. In addition, we will have to attract and retain experienced
management and employees, and we may be unable to do so. Moreover,
international operations are subject to a variety of additional risks that
could seriously harm our financial condition and operating results. These
risks include the following:
. the impact of recessions in economies outside the United States;
. political and economic instability;
. potentially adverse tax consequences;
. reduced protection for intellectual property rights in some countries;
. longer payment cycles and problems in collecting accounts receivable;
. the burden and expense of complying with foreign laws and regulations;
. currency issues, including fluctuations in currency exchange rates and
the conversion to the euro by all countries of the European Union by
year end 2003;
. tariffs, trade barriers and other import and export restrictions
including restrictions on the import and export of sensitive
technologies; and
. seasonal reductions in business activity in parts of the world, such as
during the summer months in Europe.
We must maintain our reputation and expand our name recognition to remain
competitive
We believe that establishing and maintaining name recognition and a good
reputation is critical to attracting and expanding our targeted client base as
well as attracting and retaining qualified employees. We also believe that the
importance of reputation and name recognition will increase due to the growing
number of Internet professional services providers. We are changing our name
in connection with this offering. If our reputation is damaged or if we are
unable to establish name recognition with respect to our new name, we may
become less competitive or lose our market share. In addition, our name could
be associated with any business difficulties of our clients. As a result, the
difficulties or failure of one of our clients could damage our reputation and
name and make it difficult for us to compete for new business.
9
<PAGE>
Our business will be negatively affected if we do not keep up with the
Internet's rapid technological changes, evolving industry standards and
changing client requirements
The Internet professional services industry is characterized by rapidly
changing technology, evolving industry standards and changing client needs.
Accordingly, our future success will depend, in part, on our ability to meet
these challenges in a timely and cost-effective manner. Among the most
important challenges facing us is the need to:
. effectively use leading technologies;
. continue to develop our strategic and technical expertise;
. influence and respond to emerging industry standards and other
technological changes;
. enhance our current service offerings; and
. develop new services that meet changing customer needs.
Our success depends on increased adoption of the Internet as a means of
conducting business
Our future success depends heavily on the acceptance and use of the
Internet as a means for conducting business. If commerce on the Internet does
not continue to grow, or grows more slowly than expected, our growth would
decline and our business would be seriously harmed. Customers and businesses
may reject the Internet as a viable commercial medium for a number of reasons,
including:
. inadequate network infrastructure;
. delays in the development of Internet enabling technologies and
performance improvements;
. delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
. delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information;
. changes in, or insufficient availability of, telecommunications services
to support the Internet; and
. failure of companies to meet their customers' expectations in delivering
goods and services over the Internet.
The Internet professional services industry is highly competitive and has
low barriers to entry; if we cannot effectively compete, our revenue may
decline
The Internet professional services industry is relatively new and intensely
competitive. We expect competition to intensify even further as the Internet
professional services market evolves. Some of our competitors have more
clients, greater brand or name recognition and greater financial, technical,
marketing and public relations resources than we do. As a result, our
competitors may be in a stronger position to respond quickly to new or
emerging technologies and changes in client requirements. They may also
develop and promote their products and services more effectively than we do.
There are relatively low barriers to entry into the Internet professional
services industry. In addition, we have no patented technology and limited
other proprietary rights that would preclude or inhibit competitors from
providing services similar to ours. As a result, new and unknown market
entrants pose a threat to our business.
Current or future competitors may also develop or offer services that are
comparable or superior to ours at a lower price, which could affect our
ability to retain existing clients and attract new clients. In addition,
current and potential competitors have established or may establish corporate
relationships among themselves or other third parties to increase their
ability to address customer needs. Accordingly, it is possible that new
competitors
10
<PAGE>
or alliances among competitors may emerge and rapidly acquire significant
market share. We cannot assure you that we will be able to continue to compete
successfully with our existing competitors or any new competitors.
Actual and perceived conflicts of interest may restrict us in obtaining new
clients
Actual and perceived conflicts of interest are inherent in our industry. We
sometimes decline to accept potential clients because of actual or perceived
conflicts of interest with our existing clients. In addition, potential
clients may choose not to retain us for reasons of actual or perceived
conflicts of interest. Many of our clients compete in industries where only a
limited number of companies gain meaningful market share. As a result, if we
decide not to perform services for a particular client's competitors, or if
potential clients choose not to retain us because of actual or perceived
conflicts and our client fails to capture a significant portion of its market,
we are unlikely to receive future revenue in that particular industry.
Potential future acquisitions could be difficult to integrate, disrupt our
business, adversely affect our operating results and dilute shareholder value
We may acquire other businesses in the future, which may complicate our
management tasks. We may need to integrate widely dispersed operations with
distinct corporate cultures. Our failure to do so could result in our
inability to retain the management, key personnel, employees and clients of
the acquired business. Such integration efforts also may distract our
management from servicing existing clients. Our failure to manage future
acquisitions successfully could seriously harm our operating results. Also,
acquisition costs could cause our quarterly operating results to vary
significantly. Furthermore, our shareholders could be diluted if we finance
the acquisitions by incurring debt or issuing equity securities.
We may need to raise additional capital, which may not be available to us,
and which may, if raised, dilute your ownership interest in us
We expect that our net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure needs for at least the next
12 months. After that, we may need to raise additional funds, and we cannot be
certain that we will be able to obtain additional financing on favorable terms
or at all. If we need additional capital and cannot raise it on acceptable
terms, we may not be able to:
. open new offices;
. create additional market-specific business units;
. enhance our infrastructure;
. hire, train and retain employees;
. keep up with technological advances;
. respond to competitive pressures or unanticipated requirements; or
. pursue acquisition opportunities.
Our failure to do any of these things could restrict our growth, hinder our
ability to compete and seriously harm our financial condition. Additionally,
if we are able to raise additional funds through equity financings, your
ownership interest in us will be diluted.
We have a history of reported net losses and there can be no assurance that
we will soon report net income
We have experienced substantial net losses for the three years ended
December 31, 1999. These losses have been attributable to charges for stock-
based compensation and the amortization of intangible assets. We expect to
continue to report large charges for these items over the next four years. Our
anticipated revenue growth may not compensate for these charges and we may not
achieve profitability during this time period.
11
<PAGE>
The Year 2000 problem may adversely affect our business
The Year 2000 problem refers to the potential for system and processing
failures of date-related data arising from the use of two digits by computer-
controlled systems, rather than four digits, to define the applicable year. We
may encounter the Year 2000 problem in three contexts:
. Our clients. The failure of our clients to ensure that their operations
are Year 2000 compliant could have a material adverse effect on them,
which, in turn, could limit their ability to retain third party service
providers such as Digitas. In addition, clients or potential clients may
delay purchasing software and related products and services, including
those of Digitas, due to concerns related to Year 2000 problems.
. Our suppliers. Our business could be adversely affected if we cannot
obtain products, services or systems that are Year 2000 compliant when
we need them or if the products, services or systems that we have
obtained are not Year 2000 compliant.
. Our services. The solutions which we provide to our clients integrate
software and other technology from different providers. If there is a
Year 2000 problem with respect to a solution provided by us, it may be
difficult to determine whether the problem relates to services which we
have performed or is due to the software, technology or services of
other providers. Furthermore, in the past, we entered into a number of
contracts with express or implied warranties with respect to Year 2000
readiness which may make us vulnerable to Year 2000-related lawsuits,
whether or not the services we have performed are Year 2000 compliant.
We cannot be certain what the outcomes of these types of lawsuits may
be.
Risks Related to the Securities Markets and This Offering
Our stock price may be volatile and may result in substantial losses for
investors purchasing shares in the offering
The market price of our common stock is likely to be highly volatile. The
stock market in general, and the market for Internet-related stocks in
particular, has been highly volatile. This volatility often has been unrelated
to the operating performance of particular companies. We cannot assure you
that our common stock will trade at the same levels of other Internet-related
stocks or that Internet-related stocks in general will sustain their current
market prices. We also cannot assure you that an active public market for our
securities will develop or continue after this offering.
In addition, the trading price of our common stock could be subject to wide
fluctuations in response to:
. our perceived prospects;
. variations in our operating results and our achievement of key business
targets;
. changes in securities analysts' recommendations or earnings estimates;
. differences between our reported results and those expected by investors
and securities analysts;
. announcements of new contracts or service offerings by us or our
competitors;
. market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors; and
. general economic or stock market conditions unrelated to our operating
performance.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management attention and resources.
12
<PAGE>
Concentration of ownership may limit your ability to influence corporate
matters
Immediately following this offering, our executive officers, directors and
significant shareholders collectively will own approximately 77.4% of the
outstanding shares of our common stock. If these shareholders choose to act or
vote together, they will have the power to control the election of our
directors, and the approval of any other action requiring the approval of our
shareholders, including any amendments to our certificate of incorporation and
mergers or sales of all or substantially all of our assets. In addition,
without the consent of these shareholders, we could be prevented from entering
into transactions that could be beneficial to us or our other shareholders.
Also, third parties could be discouraged from making a tender offer or bid to
acquire Digitas at a price per share that is above the then-current market
price.
We will have broad discretion over the use of our net proceeds from this
offering, and you may not agree with how we use them
Our management will have significant flexibility in applying our net
proceeds from this offering and may use the net proceeds in ways with which
shareholders disagree. Management's failure to effectively apply these net
proceeds could have an adverse effect on our ability to implement our business
strategy.
Purchasers in this offering will incur immediate and substantial dilution
The initial public offering price of our common stock of $24.00 per share
is substantially higher than the net tangible book value per share of the
outstanding common stock after the offering of $1.64 per share. As a result,
if we were liquidated for our net tangible book value immediately following
this offering, each shareholder purchasing in this offering would receive
$22.36 per share less than the price they paid for their common stock. In
addition, because our success is so heavily dependent on our ability to
attract and retain talented personnel, we expect to offer a significant number
of stock options to employees in the future. As of December 31, 1999, there
were 28,308,972 shares of common stock issuable upon exercise of outstanding
stock options, with 10,254,700 shares of common stock reserved for future
grant. In addition there were 900,000 shares of common stock issuable upon
exercise of outstanding warrants. New issuances will cause further dilution to
investors.
Future sales of our common stock may depress our stock price
Sales of a substantial number of shares of our common stock in the public
market after the closing of this offering, or the perception that such sales
could occur, could adversely affect the market price of our common stock and
could make it more difficult for us to raise funds through future offerings of
common stock. For a description of the shares of common stock that are
available for future sale, see "Shares Eligible for Future Sale."
Risks Related to Legal Uncertainty
We may be subject to lawsuits as a result of our attempts to hire qualified
people
Some companies have adopted a strategy of suing or threatening to sue
former employees and their new employers. As we hire new employees from our
current or potential competitors we may become a party to one or more lawsuits
involving the former employment of one of our employees. Any future litigation
against us or our employees, regardless of the outcome, may result in
substantial costs and expenses to us and may divert management's attention
away from the operation of our business.
We may not be able to protect our intellectual property and proprietary
rights
We cannot guarantee that the steps we have taken to protect our proprietary
rights will be adequate to deter misappropriation of our intellectual
property. In addition, we may not be able to detect unauthorized use of our
intellectual property and take appropriate steps to enforce our rights. If
third parties infringe or misappropriate our trade secrets, copyrights,
trademarks or other proprietary information, our business could be seriously
13
<PAGE>
harmed. In addition, although we believe that our proprietary rights do not
infringe on the intellectual property rights of others, other parties may
assert infringement claims against us or claim that we have violated their
intellectual property rights. Such claims, even if not true, could result in
significant legal and other costs and may be a distraction to management. If
any party asserts a claim against us relating to proprietary technology or
information, we may need to obtain licenses to the disputed intellectual
property. We cannot assure you, however, that we will be able to obtain any
licenses at all. In addition, protection of intellectual property in many
foreign countries is weaker and less reliable than in the United States so, as
our business expands into foreign countries, risks associated with protecting
our intellectual property will increase.
Changes in government regulation of the Internet could adversely affect our
business
To date, government regulations have not materially restricted the use of
the Internet by our clients in their markets. However, the legal and regulatory
environment that pertains to the Internet may change. New laws and regulations,
or new interpretations of existing laws and regulations, could impact us
directly or indirectly by preventing our clients from delivering products or
services over the Internet or slowing the growth of the Internet. New state,
federal and foreign laws and regulations may be adopted regarding any of the
following issues:
. user privacy;
. the pricing and taxation of goods and services offered over the
Internet;
. the content of Web sites;
. consumer protection; and
. the characteristics and quality of products and services offered over
the Internet.
Any new legislation could inhibit the increased use of the Internet as a
commercial medium which in turn would decrease the demand for our services and
have a material adverse effect on our future operating performance.
We may become subject to claims regarding foreign laws and regulations,
which could subject us to increased expenses
Because we plan to expand our international operations and because many of
our current clients have international operations, we may be subject to the
laws of foreign jurisdictions for violations of their laws. These laws may
change, or new, more restrictive laws may be enacted in the future.
International litigation is often expensive and time-consuming and could
distract our management's attention away from the operation of our business.
Provisions of Delaware law and of our charter and by-laws may make a
takeover more difficult
Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt which is opposed
by our management and board of directors. Public shareholders who might desire
to participate in such a transaction may not have an opportunity to do so. In
our certificate of incorporation we also have a staggered board of directors
which makes it difficult for shareholders to change the composition of the
board of directors in any one year. These anti-takeover provisions could
substantially impede the ability of public shareholders to benefit from a
change in control or change our management and board of directors. See
"Description of Capital Stock."
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties
This prospectus contains forward-looking statements. In some cases you can
identify these statements by forward-looking words such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "should," "will,"
and "would" or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our
14
<PAGE>
financial position or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control and our actual results may differ materially from the
expectations we describe in our forward-looking statements. Before you invest
in our common stock, you should be aware that the occurrence of the events
described in these risk factors and elsewhere in this prospectus could have an
adverse effect on our business, results of operations and financial position.
15
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 6,200,000 shares of
common stock in this offering will be approximately $135.4 million, at an
initial public offering price of $24.00 per share and after deducting
estimated underwriting discounts and commissions and our estimated offering
expenses. We estimate that our net proceeds will be used as follows:
. approximately $69.0 million will be used to repay outstanding debt under
the term loan portion of our credit facility;
. approximately $15.5 million will be used to repay outstanding borrowings
under the revolving credit portion of our credit facility;
. approximately $1.9 million will be used to repay accrued and unpaid
interest on the term loan and revolving credit; and
. approximately $4.5 million will be used to repay two outstanding notes
issued in connection with the repurchase of options and warrants.
The remaining $44.5 million will be used to support the working capital
requirements and capital expenditures associated with our anticipated growth,
including expenditures related to infrastructure improvements and the opening
of new offices in the U.S. or abroad.
We may invest a portion of the net proceeds that are not used to retire
debt to finance selective acquisitions of complementary businesses, make
strategic investments in new businesses, or accelerate our office expansion
plans, in each case as economically justified opportunities are presented. We
intend to consider both acquisitions and internal development as alternatives
for expanding our current capabilities and geographic presence. Although we
regularly review strategic acquisition opportunities, we have no binding
agreements with respect to any material acquisitions at this time.
As of December 31, 1999, there was approximately $68.5 million outstanding
under the term loan portion of our credit facility, which bore interest on
that date of 8.475%. The term loan portion of the credit facility is repayable
in quarterly installments which commenced on September 30, 1999 with final
maturity on December 31, 2004. We received the proceeds of the term loan
portion of the credit facility in January 1999 and used them in connection
with the recapitalization primarily to repay indebtedness, satisfy contractual
obligations to former shareholders, make transaction payments to existing
equity holders, repurchase stock options and stock appreciation rights and pay
expenses. As of December 31, 1999, there was nothing outstanding under the
revolving credit portion of our credit facility, which bore interest on that
date of 9.8%. The revolving credit portion of the credit facility is repayable
on December 31, 2004. The revolving credit facility was originated in January
1999 and is used to finance seasonal working capital requirements.
Until allocated for specific use, we will invest our net proceeds in
government securities and other short-term, investment-grade securities.
Digitas will not receive any of the proceeds from the sale of common stock in
this offering by the selling shareholders.
DIVIDEND POLICY
We currently intend to retain any future earnings to finance the expansion
of our business and do not expect to pay any cash dividends in the foreseeable
future. Any decision to pay cash dividends after the offering will be at the
discretion of our board of directors after taking into account such factors as
our financial condition, operating results, current and anticipated cash
needs, plans for expansion and restrictions in our financing agreements.
16
<PAGE>
INDUSTRY INFORMATION
This prospectus includes data concerning the Internet professional services
industry that we obtained from material published by International Data
Corporation. These publications generally indicate that they have obtained
information from sources that they believe are reliable, but that they do not
guarantee the accuracy and completeness of the information. Although we
believe that these industry publications are reliable, we have not
independently verified their data. We also have not sought the consent of any
of these publications to refer to their data in this prospectus.
17
<PAGE>
CAPITALIZATION
The following table sets forth our cash, short-term debt and capitalization
as of December 31, 1999:
. on an actual basis; and
. as adjusted to reflect our sale of 6,200,000 shares of common stock in
this offering at an initial public offering price of $24.00 per share,
after deduction of estimated underwriting discounts and commissions and
our estimated offering expenses and the use of the net proceeds as
described in "Use of Proceeds."
<TABLE>
<CAPTION>
As of
December 31, 1999
----------------------
Actual As Adjusted
-------- ------------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................... $ 441 $ 62,642
======== ========
Short-term debt ........................................ $ 7,928 $ 587
======== ========
Long-term debt, less current portion.................... $ 62,878 1,714
Shareholders' equity (deficit):
Common stock, 50,703,479 shares, no par value per
share, authorized, issued and outstanding, actual;
and 56,903,479 shares, $.01 par value per share,
issued and outstanding, as adjusted.................. -- 569
Additional paid-in capital............................ 208,153 342,992
Accumulated deficit................................... (40,028) (40,028)
Deferred compensation................................. (48,289) (48,289)
-------- --------
Total shareholders' equity.......................... 119,836 255,244
-------- --------
Total capitalization................................ $182,714 $256,958
======== ========
</TABLE>
The table above excludes 28,308,972 shares of common stock issuable upon
exercise of stock options outstanding at December 31, 1999 at a weighted
average exercise price of $2.66 per share and 900,000 shares of common stock
issuable upon exercise of warrants outstanding at December 31, 1999 at a
weighted average exercise price of $2.52 per share.
18
<PAGE>
DILUTION
As of December 31, 1999, we had a net tangible book (deficit) of $(42.3)
million or $(0.83) per share of common stock. Net tangible book value per
share is determined by dividing our tangible net book value (total tangible
assets less total liabilities) by the total number of shares of common stock
outstanding. After giving effect to the sale of the 6,200,000 shares of common
stock offered by us in this offering at an initial public offering price of
$24.00 per share, and after deducting estimated underwriting discounts and
commissions and offering expenses payable by us, our adjusted net tangible
book value would have been approximately $93.1 million, or $1.64 per share of
common stock. This represents an immediate increase in net tangible book value
of $2.47 per share to existing shareholders and an immediate dilution of
$22.36 per share to new investors purchasing shares of common stock in the
offering. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $24.00
Net tangible book value per share before the offering as
of December 31, 1999..................................... $(0.83)
Increase in net tangible book value per share attributable
to new investors......................................... 2.47
------
Net tangible book value per share after the offering........ 1.64
------
Dilution per share to new investors......................... $22.36
======
</TABLE>
The following table summarizes, as of December 31, 1999, the number of
shares of common stock purchased from us, the total consideration paid and the
average price per share paid by our existing shareholders and to be paid by
new investors in this offering at an initial public offering price of $24.00
per share, and before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ 50,703,479 89.1% $153,555,000 50.8% $ 3.03
New investors(1)........ 6,200,000 10.9 148,800,000 49.2 24.00
---------- ----- ------------ -----
Total................. 56,903,479 100.0% 302,355,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Sales by selling shareholders in this offering will reduce the number of
shares held by existing shareholders to 47,603,479 or approximately 83.7%
and will increase the number of shares held by new investors to 9,300,000
or approximately 16.3% of the total number of shares of common stock
outstanding after this offering.
The discussion and table above exclude:
. up to 930,000 shares of common stock to be issued by us pursuant to the
over-allotment option granted to the underwriters;
. 28,308,972 shares of common stock issuable upon exercise of stock
options outstanding as of December 31, 1999 at a weighted average price
of $2.66 per share;
. 900,000 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 1999 at a weighted average price of $2.52
per share;
. 10,254,700 shares of common stock available for future grant under our
stock option plans as of December 31, 1999; and
. 2,200,000 shares of common stock reserved for purchase after this
offering under our employee stock purchase plan.
To the extent these options and warrants are exercised and the underlying
shares are issued, there will be further dilution to new investors.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined statement of operations data
reflect the combined results of operations of the predecessor for the year
ended December 31, 1998, as if the recapitalization and related purchase
accounting described in Note 3 to the financial statements had occurred on
January 1, 1998.
The unaudited pro forma combined statement of operations data are based on
the historical financial statements for the predecessor and the assumptions
and adjustments described in the accompanying notes. The unaudited pro forma
combined statement of operations data do not purport to represent what our
results of operations actually would have been if the recapitalization had
occurred on the date indicated or what the results may be for any future
periods. The unaudited pro forma combined statement of operations data are
based upon assumptions that we believe are reasonable and should be read in
conjunction with our financial statements and accompanying notes thereto
included elsewhere in this prospectus.
Unaudited Pro Forma Combined Statement of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------
Predecessor Pro Forma
(Combined) Adjustments Combined
----------- ----------- ---------
<S> <C> <C> <C>
Statement of operations data:
Revenue................................. $122,309 -- $122,309
Operating expenses:
Professional services costs............ 65,696 -- 65,696
Selling, general and administrative
expense............................... 48,485 -- 48,485
Stock-based compensation............... 25,820 $(20,130)(/1/) 5,690
Amortization of intangible assets...... -- 36,688 (/2/) 36,688
-------- -------- --------
Total operating expenses.............. 140,001 16,558 156,559
-------- -------- --------
Income (loss) from operations........... (17,692) (16,558) (34,250)
Other income (expense).................. (2,698) (3,850)(/3/) (6,548)
Benefit from (provision for)
income taxes........................... 1,439 (5,486)(/4/) (4,047)
-------- -------- --------
Net income (loss)....................... $(18,951) $(25,894) $(44,845)
======== ======== ========
</TABLE>
- --------
(1) Reflects exclusion of stock appreciation rights compensation expense of
$20,130,000 as appreciation would have been recorded in the period prior
to the recapitalization taking place.
(2) Reflects a portion of the $171,726,000 of goodwill which is being
amortized over seven years and a portion of the $27,134,000 of other
intangible assets which are being amortized over two to six years, as if
the recapitalization took place at the beginning of the period.
(3) Reflects additional interest expense, at an assumed interest rate of
8.43%, from the $73,399,000 debt incurred in connection with the
recapitalization as if it occurred at the beginning of the period. Other
expense increases as a result of the amortization of debt issue costs. A
.125% change in the assumed interest rate of 8.43% would change interest
expense by approximately $90,000 on an annual basis.
(4) Represents tax adjustments to reflect the pro forma income tax provision
at an effective tax rate of 9.92%.
20
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following financial data for each of the years 1995 through 1998 have
been derived from our annual financial statements, which have been audited by
PricewaterhouseCoopers LLP. The data for 1999 have been derived from our
annual financial statements, which have been audited by Arthur Andersen LLP.
Because the recapitalization has been accounted for as a purchase, the
financial statements for the periods after January 1, 1999 are not comparable
to prior periods. Our historical results are not necessarily indicative of
results for any future period. Before the recapitalization, the two
predecessor companies were S corporations and thus were not subject to federal
income taxation. In addition, because the two companies had different numbers
of common shares outstanding that bear no relationship to our current number
of common shares outstanding, net income (loss) per share has not been
presented for periods before the recapitalization.
<TABLE>
<CAPTION>
Predecessor (Combined) Company
------------------------------------ ------------
Year
Year Ended December 31, Ended
------------------------------------ December 31,
1995 1996 1997 1998 1999
------- ------- -------- -------- ------------
(in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue..................... $66,244 $83,157 $101,238 $122,309 $187,007
Operating expenses:
Professional services
costs..................... 32,922 43,272 57,610 65,696 102,247
Selling, general and
administrative expense.... 35,607 40,982 40,552 48,485 67,048
Stock-based compensation
(1)....................... 628 6,325 25,820 10,743
Amortization of intangible
assets.................... -- -- -- -- 36,688
------- ------- -------- -------- --------
Total operating
expenses................ 68,529 84,882 104,487 140,001 216,726
Loss from operations........ (2,285) (1,725) (3,249) (17,692) (29,719)
Other income (expense),
net........................ 151 (1,281) (2,431) (2,698) (7,281)
Benefit from (provision for)
income taxes............... (345) (160) 114 1,439 (567)
------- ------- -------- -------- --------
Net loss.................... $(2,479) $(3,166) $ (5,566) $(18,951) $(37,567)
======= ======= ======== ======== ========
Net loss per share
Basic and diluted......... $ (0.74)
========
Weighted average common
shares outstanding
Basic and diluted......... 50,703
<CAPTION>
As of December 31,
--------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents... $11,685 $ 301 $ 1,868 $ 37 $ 441
Total assets................ 36,971 33,649 49,705 62,270 252,889
Total long-term debt, less
current portion............ -- 2,990 3,701 1,749 62,878
Shareholders' equity
(deficit).................. 383 4,625 (9,831) (27,760) 119,836
</TABLE>
- --------
(1) Stock-based compensation of the predecessor includes annual profit
distributions and increases in the value of stock appreciation rights
("SARs") held by predecessor employees. Stock-based compensation related
to appreciation of SARs resulting from the recapitalization of
$20,130,000 was recognized in the fourth quarter of 1998. Stock-based
compensation of the company primarily relates to non-cash compensation
arising from stock options granted to employees at exercise prices below
the estimated fair value of the underlying common stock, the repurchase
of stock options from an employee and shares of common stock sold to
members of the board of directors at a price below the estimated fair
value. See Note 8 to the financial statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial
statements and related notes appearing elsewhere in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those indicated
in forward-looking statements. See "Risk Factors."
Overview
In 1980, Bronner Slosberg Humphrey Co. was formed to provide direct
marketing and promotion services. In 1995, Strategic Interactive Group, an
Internet professional services firm, was formed to provide end-to-end Internet
business solutions to corporate clients. Between 1995 and 1998, Strategic
Interactive Group and Bronner Slosberg Humphrey Co. operated as two separate
entities under common control. By January 1999, Strategic Interactive Group
had grown so large and the two companies had become so interrelated that the
two businesses were merged into a single entity following a recapitalization
by a private equity investor and several of our existing shareholders. The
purpose of the recapitalization was to combine the entities, realign the
ownership of the combined entities with those senior employees who would most
actively lead our future growth, establish an equity-based incentive program
to motivate our current and future employees and enhance our ability to make
strategic investments in our people and services.
Business Operations
Our revenue is generated from providing professional services to our
clients. We expect that our revenue will continue to be driven primarily by
the number and scope of our client engagements. We focus on large-scale, long-
term, strategic relationships with a select group of clients. For 1999, our
three largest clients accounted for approximately 62% of our revenue and our
largest client accounted for approximately 23% of our revenue.
Historically, we have offered our services to clients primarily on a time
and materials basis. For these engagements, we recognize revenue as services
are provided based on actual costs incurred. As our client relationships have
grown, we have increasingly entered into broad contracts under which we
deliver our services based on mutually agreed upon scopes of work. These
contracts generally include estimates on total fees that clients will be
charged for the year. For these contracts, we recognize revenue on a
percentage of completion method based on the ratio of costs incurred to total
estimated costs. Additionally, some of our contracts include a discretionary
bonus provision whereby we get additional compensation based on our
performance as evaluated by our clients. We recognize bonus revenue in the
period we are informed that the bonus has been awarded. Most of our contracts
allow us to invoice our clients on a pro-rata basis for our services.
We incur significant reimbursable costs, such as on-line media buying and
production costs, on behalf of our clients. In accordance with the client
agreements, there is not a markup on reimbursable costs and the client's
approval is required prior to Digitas incurring them. Revenue does not include
reimbursable costs.
Professional services costs consist of professional salaries, payroll taxes
and benefits for our professional staff plus other non-reimbursable costs
directly attributable to servicing our clients. In addition to the
compensation of employees engaged in the delivery of professional services,
professional salaries include compensation for selling and management by our
senior account managers and most of our executives. We expect that per capita
professional services costs will increase over time due primarily to wage
increases, particularly among technology professionals.
Selling, general and administrative expense consists primarily of
administrative and executive compensation, recruiting, professional fees, rent
and office expenses. In 2000, we expect to make significant expenditures for
recruiting and training as we expand our operations. We have incurred
significant costs to expand our operations internationally through our office
in London. We believe that a key source of our growth will be servicing
existing clients on a worldwide basis, as well as attracting new clients in
international markets.
22
<PAGE>
Stock-based compensation before the recapitalization consisted of annual
distributions and increases in the value of stock appreciation rights
resulting from the pending acquisition of the company. Stock-based
compensation after the recapitalization consisted primarily of non-cash
compensation arising from stock options granted to employees at exercise
prices below the estimated fair value of the underlying common stock, the
repurchase of stock options from an employee and shares of common stock sold
to members of the board of directors at a price below the estimated fair
value.
In connection with the recapitalization we recorded $198.9 million of
goodwill and other intangible assets. This amount, which represents the excess
of purchase price over net assets acquired, is being amortized over two to
seven years.
We were taxed as an S corporation until January 1999 when we terminated our
S corporation election and became subject to federal taxation. No provision or
liability for federal taxes is reflected for periods prior to 1999. For the
periods prior to 1999, we have recorded provisions, tax assets and liabilities
for Massachusetts and various states where we do business that have a limited
state corporate income and excise tax.
Results of Operations
The following table sets forth selected items included in our statement of
operations as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Predecessor
(Combined) Company
------------- ------------
Year Ended
December Year
31, Ended
------------- December 31,
1997 1998 1999
----- ----- ------------
<S> <C> <C> <C>
Revenue............................................ 100.0 % 100.0 % 100.0 %
Operating expenses:
Professional services costs...................... 56.9 53.7 54.7
Selling, general and administrative expense...... 40.1 39.7 35.9
Stock-based compensation......................... 6.2 21.1 5.7
Amortization of intangible assets................ -- -- 19.6
----- ----- -----
Total operating expenses....................... 103.2 114.5 115.9
----- ----- -----
Loss from operations............................... (3.2)% (14.5)% (15.9)%
===== ===== =====
</TABLE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenue. Revenue for 1999 increased by $64.7 million, or 52.9%, to $187.0
million from $122.3 million for 1998. The increase was due to growth in
revenue from new clients of $18.7 million and existing clients of $46.0
million. This increase in revenue was due to growth in the market for
Internet-related services.
Professional services costs. Professional services costs for 1999 increased
by $36.5 million, or 55.6%, to $102.2 million from $65.7 million for 1998.
Professional services costs represented 54.7% of revenue for 1999, as compared
to 53.7% of revenue for 1998. The increase in absolute dollars was due to an
increase in the number of professionals we hired to support the increased
demand for our services. Professional services costs increased as a percentage
of revenue for 1999 due to investments in the opening of our London office and
an increase in average compensation per professional.
Selling, general and administrative expense. Selling, general and
administrative expense for 1999 increased by $18.5 million, or 38.1%, to $67.0
million from $48.5 million for 1998. As a percentage of revenue, selling,
general and administrative expense decreased from 39.7% in 1998 to 35.9% in
1999. The increase in absolute dollars for 1999 was due to increases in
outside fees for recruiting professionals, rent and travel costs
23
<PAGE>
related to office expansion in New York and the opening of a new office in
London, and our overall growth in administrative headcount. The decrease as a
percentage of revenue was due to the economies of scale associated with higher
revenue levels.
Stock-based compensation. Stock-based compensation for 1999 consisted of
non-cash compensation arising from stock options granted to employees at
exercise prices below the estimated fair value of the related common stock of
$5.8 million, the repurchase of stock options from an employee of $1.9 million
and $3.0 million for shares of common stock sold to members of the board of
directors at a price below the estimated fair value.
Amortization of intangible assets. The increase in amortization of
intangible assets resulted from our recapitalization which was effected in
January 1999.
Interest expense, net. Interest expense, net, for 1999 increased by $4.6
million to $7.3 million from $2.7 million for 1998. The increase in interest
expense, net, for 1999 was due to the interest expense on our long-term
borrowings related to the recapitalization. Additionally, we increased
borrowings against our line of credit to fund increased working capital needs.
Benefit from (provision for) income taxes. The provision for income taxes
for 1999 was $567,000 compared to a benefit of $1.4 million in 1998. We were
an S corporation in 1998. Therefore, we were only taxable at the state level,
and we did not provide for any federal income taxes in this period.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenue. Revenue for 1998 increased by $21.1 million, or 20.8%, to $122.3
million from $101.2 million for 1997. The increase in revenue was due to
growth from new clients of $17.7 million and existing clients of $3.4 million.
This increase in revenue was due to growth in the market for Internet-related
services. In 1998, we sought to expand our client base and were successful in
developing relationships with new, large-scale clients. The revenue growth in
1998 as compared to 1997 was primarily attributable to building those
relationships.
Professional services costs. Professional services costs for 1998 increased
by $8.1 million, or 14.1%, to $65.7 million from $57.6 million for 1997.
Professional services costs represented 53.7% of revenue for 1998 as compared
to 56.9% of revenue for 1997. The increase in absolute dollars for 1998 was
due to an increase in the number of professionals we hired to support the
increased demand for our services. The decrease as a percentage of revenue for
1998 was due to an increase in employee utilization rates.
Selling, general and administrative expense. Selling, general and
administrative expense for 1998 increased by $7.9 million, or 19.5%, to $48.5
million from $40.6 million for 1997. As a percentage of revenue, selling,
general and administrative expense was not materially different from 1997 to
1998. The increase in absolute dollars was due to a one time payment to senior
management in connection with the recapitalization. This increase was also due
to general growth of the business, including opening a new office in New York,
increased recruiting costs and expanded adminstrative headcount.
Stock-based compensation. Stock-based compensation in 1998 consisted of
annual distributions of $3.0 million, compensation expense due to the vesting
of options in connection with the recapitalization of $2.6 million, and
increases in the value of stock appreciation rights resulting from the pending
acquisition of the company of $20.1 million. Stock-based compensation in 1997
included annual distributions on stock appreciation rights of $3.4 million and
a $2.9 million cash payment related to three employees who forfeited their
rights to previously issued options.
Interest expense, net. Interest expense, net, for 1998 increased by $0.3
million to $2.7 million from $2.4 million in 1997. The increase in interest
expense, net, was due to increased borrowings to fund increased working
capital needs during 1998, offset by a reduction in interest rates.
24
<PAGE>
Benefit from (provision for) income taxes. The income tax benefit for 1998
was $1.4 million compared to a tax benefit of $114,000 in 1997. We were an S
corporation in both 1998 and 1997. Therefore, we were only taxable at the
state level, and we did not provide for federal income taxes in either of
these years.
Quarterly Results of Operations
The following table sets forth a summary of our unaudited quarterly
operating results for each of the four quarters ended December 31, 1999 both
in absolute dollars and as a percentage of our revenue in each quarter. This
information has been derived from our unaudited interim financial statements
which, in our opinion, have been prepared on substantially the same basis as
the audited financial statements contained elsewhere in this prospectus and
include all normal recurring adjustments necessary for a fair presentation of
the financial information for the periods presented. The results for any
quarter are not necessarily indicative of future quarterly results of
operations, and we believe that period-to-period comparisons should not be
relied upon as an indication of future performance that may be expected for
any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
-------------- ------------- ------------------ -----------------
(in thousands, except percentage data)
<S> <C> <C> <C> <C>
Statement of operations
data:
Revenue................. $38,813 $ 44,047 $51,047 $ 53,100
Operating expenses:
Professional services
costs................ 20,041 24,350 28,847 29,009
Selling, general and
administrative
expense.............. 13,905 15,593 16,336 21,214
Stock-based
compensation ........ -- 5,197 751 4,795
Amortization of
intangible assets.... 9,172 9,172 9,172 9,172
------- -------- ------- --------
Total operating
expenses............... 43,118 54,312 55,106 64,190
------- -------- ------- --------
Loss from operations.... (4,305) (10,265) (4,059) (11,090)
Other income (expense):
Interest income....... -- -- 12 43
Interest expense...... (1,647) (1,874) (1,823) (1,992)
------- -------- ------- --------
(1,647) (1,874) (1,811) (1,949)
------- -------- ------- --------
Loss before provision
for income taxes....... (5,952) (12,139) (5,870) (13,039)
Provision for income
taxes.................. (91) (186) (90) (200)
------- -------- ------- --------
Net loss................ $(6,043) $(12,325) $(5,960) $(13,239)
======= ======== ======= ========
As a percentage of
revenue:
Revenue................. 100.0 % 100.0 % 100.0 % 100.0%
Operating expenses:
Professional services
costs................ 51.6 55.3 56.5 54.6
Selling, general and
administrative
expense.............. 35.8 35.4 32.0 40.0
Stock-based
compensation ........ -- 11.8 1.5 9.0
Amortization of
intangible assets.... 23.6 20.8 18.0 17.3
------- -------- ------- --------
Total operating
expenses............... 111.1 123.3 108.0 120.9
------- -------- ------- --------
Loss from operations.... (11.1) (23.3) (8.0) (20.9)
Other income (expense):
Interest income....... -- -- -- 0.1
Interest expense...... (4.2) (4.3) (3.5) (3.7)
------- -------- ------- --------
(4.2) (4.3) (3.5) (3.6)
------- -------- ------- --------
Loss before provision
for income taxes....... (15.3) (27.6) (11.5) (24.5)
Provision for income
taxes.................. (0.2) (0.4) (0.2) (0.4)
------- -------- ------- --------
Net loss................ (15.6)% (28.0)% (11.7)% (24.9)%
======= ======== ======= ========
</TABLE>
25
<PAGE>
Revenue. Our growth in revenue on a quarterly basis was due to increased
demand for our Internet professional services. We recognize bonus revenue in
the period we are informed that the bonus has been awarded. Contractually we
are informed of bonuses in the first and second quarters and accordingly, we
expect that our quarterly revenue in these quarters will be positively
impacted compared to the third and fourth quarters.
Professional services costs. Professional services costs in each quarter in
1999 increased in absolute dollars as we continued to hire professionals to
keep up with client demand. As a percentage of revenue, professional services
costs have fluctuated based on employee utilization, investments in the
opening of our London office and the timing of recognition of bonus revenue.
We expect professional services costs as a percentage of revenue to increase
in the near term as we hire new professionals and expand our operations.
Selling, general and administrative expense. Selling, general and
administrative expense increased in absolute dollars in each quarter in 1999
due to increased personnel costs, growth in administrative headcount, and rent
and other expense related to regional office expansions. As a percentage of
revenue, selling, general and administrative expense decreased as a percentage
of revenue through the first three quarters due to the economies of scale
associated with higher revenue levels. As a percentage of revenue, selling,
general and administrative expenses increased during the fourth quarter due to
a real estate brokerage fee, severance costs and professional fees related to
year 2000 and other infrastructure related improvements.
Liquidity and Capital Resources
From inception through the recapitalization, we funded our operations
primarily through cash provided by operations, notes from shareholders and
bank borrowings. In connection with the recapitalization, we established
credit facilities totalling $93.4 million to repay our existing bank
borrowings, repay our notes to our shareholders, make transaction payments and
repurchase shares in connection with the recapitalization and provide working
capital to fund our ongoing operations. Long-term debt also includes an amount
related to the build out of our Boston office for costs incurred in excess of
the lease allowance.
On December 31, 1999, our long term credit agreement consisted of the
following:
. $68.5 million outstanding under a $73.4 million term loan due December
31, 2004; and
. a $25.0 million revolving credit facility expiring on December 31, 2004
of which up to $15.0 million may be used to support standby letters of
credit.
Amounts borrowed under the term loan and the revolving credit facility bear
interest, at our option, at either the base rate plus a margin of 0.5% to
2.0%, or LIBOR plus a margin of 1.5% to 3.0%. At December 31, 1999, the
applicable borrowing rate for the term loan was 8.5% and the borrowing rate
for the revolving credit was 9.8%. Additionally, we are required to pay a
commitment fee of 0.5% of the average daily unused amount of the revolving
credit. At December 31, 1999, we had no cash borrowings under the revolving
credit and $10.3 million outstanding standby letters of credit, leaving $14.7
million available for future borrowings.
We are required to maintain, until November 25, 2000, an interest rate
protection vehicle which would establish a maximum interest rate of not more
than 10% per annum and would have a notional principal amount of not less than
50% of the total term debt of $73.4 million.
The credit facilities contain change of control provisions and impose
restrictive covenants upon us related to the incurrence of indebtedness,
contingent obligations, transactions with affiliates, business combinations,
investments, asset sales and payments of dividends. Financial covenants,
including interest coverage and leverage ratios, maximum capital expenditures
and minimum EBITDA levels, effective through the first quarter of 2001, are
also imposed on us. Additionally, we are required to reduce the outstanding
aggregate principal balance of the revolving credit facility so that the
balance does not exceed $8.0 million for 30 consecutive days during each
consecutive 12 month period. As of December 31, 1999, we were in compliance
with the credit facility.
26
<PAGE>
Our operating activities provided cash of $1.5 million in 1997, $8.2
million in 1998 and $14.4 million in 1999.
Additionally, distributions paid to shareholders used cash of $315,000 in
1998 and $2.5 million for 1999.
We incurred capital expenditures of $7.9 million in 1997, $6.3 million in
1998 and $8.5 million in 1999. These expenditures were incurred primarily for
computer equipment, telecommunications equipment, furniture and fixtures, and
leasehold improvements to support our growth. In 2000, we expect to spend
approximately $22.0 million on similar types of capital expenditures,
including approximately $8.5 million for infrastructure, leasehold
improvements, and relocation expenses for our new office space in New York and
London. We expect to spend approximately $10.5 million on corporate technology
systems in 2000.
We believe that the proceeds of this offering and funds that are available
under our line of credit will be sufficient to finance our working capital and
capital expenditure requirements for the next twelve months.
Market Risk
Under the terms of our credit agreement, we utilize interest rate swap
agreements to fix interest rates on portions of the variable rate term loan
and to mitigate the effect of changes in interest rates on earnings. We
entered into separate agreements on February 22 and 24, 1999, each for a
notional amount of $20.0 million and each having a maturity date of February
2001. Under the terms of the agreements, we locked in fixed rates of 5.36% and
5.30%, on the notional amounts and we compensate the financial institution or
are compensated by the financial institution for the differential between the
fixed rates and the current LIBOR rate. The interest rate differential payable
or accruable on the agreements is recognized on an accrual basis as an
adjustment to interest expense. At December 31, 1999 the fair values of the
interest rate swaps, which represent the amounts we would receive or pay to
terminate the respective agreements, are net receivables of $240,000 and
$273,000 based on dealer quotes. The variable rates at December 31, 1999 were
6.5% and 6.1%.
The market risk exposure from the interest rate swap is assessed in light
of the underlying interest rate exposures. Credit risk is minimized as the
agreement is with the major financial institutions Fleet Bank and BankBoston.
We monitor the credit worthiness of these financial institutions and full
performance is anticipated.
Year 2000 Compliance
Year 2000 Issue. The year 2000 issue refers to problems resulting from
computer programs or systems which store or process date-related information
using only the last two digits to refer to a year. These programs or systems
may not be able to distinguish properly between a year in the 1900's and a
year in the 2000's. Failure of these programs or systems to distinguish
between the two centuries could cause the programs or systems to create
erroneous results or even to fail.
Our State of Readiness. We established a year 2000 readiness team to carry
out a program for the assessment of our vulnerability to the year 2000 issue
and remediation of identified problems. The team consisted of senior
information technology and business professionals and met on a regular basis.
An outside consultant also worked with the readiness team on a temporary basis
to assist them in carrying out their tasks.
The readiness team developed a program with the following key phases to
assess our state of year 2000 readiness:
. develop a complete inventory of our hardware and software, and assess
whether that hardware and software is year 2000 ready;
. test our internal hardware and software which we believe have a
significant impact on our daily operations to assess whether it is year
2000 ready;
. upgrade, remediate or replace any of our hardware or software that is
not year 2000 ready; and
27
<PAGE>
. develop a business continuity plan to address possible year 2000
consequences which we cannot control directly or which we have not been
able to test or remediate.
We completed all of the tasks that our program required, including:
. we completed the inventory of hardware and software at all of our
locations and determined that all of the inventoried hardware and
software which we believe have a significant impact on our daily
operations are year 2000 ready or can be made ready with minimal changes
or replacements, based on our vendors' web site certifications
statements and commercially available year 2000 testing products;
. we developed a list of all vendors which we deem to have a significant
business relationship with us. Of the approximately 21 vendors we
identified, we obtained web site certifications or obtained assurances
with respect to the year 2000 readiness of products or services that we
purchase from those vendors;
. we completed testing and implementation of any changes necessary to our
internal hardware and software which we believe have a significant
impact on our daily operations to confirm their year 2000 readiness;
. we completed an internal review to determine the commitments we made to
our customers with respect to the year 2000 readiness of solutions which
we provided to those customers; and
. we formulated a business continuity plan that encompassed our strategy
for preparation, notification and recovery in the event of a failure due
to the year 2000 issue. The plan included procedures to minimize
downtime and expedite resumption of business operations and other
solutions for responding to failures in our internal information
technology department as well as widespread external failures related to
the year 2000 issue.
Costs. Through December 31, 1999, we incurred approximately $3.6 million in
connection with our year 2000 readiness program. This amount included internal
labor costs, outside consulting costs and additional hardware and software
purchases. We do not expect to incur any material additional expenses in
connection with our year 2000 readiness program, although there can be no
assurance that we will not be required to do so.
Risks. We believe that the most likely worst case scenarios related to the
year 2000 issue for our business are as follows:
. if a solution which we provided to a client causes damage or injury to
that client because the solution was not year 2000 compliant, under the
terms of some agreements we could be liable to the client for breach of
warranty; and
. if there is a significant and protracted interruption of
telecommunication services to our main office, we would be unable to
conduct business because of our reliance on telecommunication systems to
support daily operations, such as internal communications through e-
mail.
To date, we are unaware of any problems with our systems that are year 2000
related, nor are we aware of any year 2000 issues with our vendors or
customers that could cause any significant interruption in our normal business
operations or otherwise materially harm our business.
28
<PAGE>
BUSINESS
Overview
Digitas is a leading Internet professional services firm. Our clients are
largely Fortune 100 and other industry leading companies. Our services are
interrelated and fall into three categories. The first category is Digital
Strategy, which helps clients define how the Internet and emerging
technologies can be used to create competitive advantages, improve market
share and enhance levels of profitability. The second category is Technology
and Infrastructure, which helps clients build Web sites, databases and
linkages to call centers and other customer contacts in order to implement
their Digital Strategy. The third category is Marketing, which helps clients
communicate with current and prospective customers directly via both on-line
and off-line channels in order to optimize the economic value of their
customer bases.
We develop large-scale, long-term, strategic relationships with a select
group of clients that have embraced the Internet as a principal means of
business transformation. Our clients include industry leaders such as American
Electric Power, American Express, AT&T, Bausch & Lomb, Charles Schwab & Co.
Inc., General Motors, Harcourt, Johnson & Johnson, L.L. Bean, and Neiman
Marcus, which together accounted for approximately 78% of our total net
revenues for 1999. We employ approximately 1,240 professionals and are
headquartered in Boston, Massachusetts with offices in New York City, San
Francisco, Salt Lake City and London.
Industry Background
The Internet is fundamentally changing the way consumers and businesses
interact, introducing a new means of communicating, obtaining information,
purchasing goods and services, providing customer support, and soliciting
feedback. International Data Corporation, or IDC, estimates that the number of
Internet users will grow from 142 million at the end of 1998 to 500 million at
the end of 2003 and that revenues generated from Internet commerce in 2003
will exceed $2.3 trillion. The emergence of the Internet is also redefining
the core economics of businesses and forcing companies to re-evaluate and
transform the way they have traditionally conducted business and interacted
with their customers, suppliers and distribution partners.
While businesses were early to embrace the Internet as a new commercial
medium, their ability to take advantage of its full potential continues to
evolve. Initially, businesses employed internal information technology
departments or hired outside Web site design firms to develop corporate Web
sites that were viewed as additional means of advertising or promoting their
businesses. As the number of Internet users has increased and corporate Web
sites have drawn more visitors, businesses have begun to view the Internet as
another distribution channel, or an on-line storefront, through which to
conduct customer transactions. The ability to conduct transactions over the
Internet, however, requires the integration of client/server systems with Web
site design and infrastructure. Most internal information technology
departments do not have the resources to perform this integration work and as
a result many companies are seeking the assistance of outside Internet
professional services providers. IDC defines Internet services as the
consulting, design, systems integration, support, management and outsourcing
services associated with the development, deployment and management of Web
sites. IDC expects the worldwide market for Internet services to grow at a
five-year compounded annual rate of 59%, from $7.8 billion in 1998 to $78.5
billion in 2003.
We believe most businesses must transact with customers over the Internet
to retain and enhance their competitive positions. Widespread adoption of the
on-line transaction model, however, is only the beginning of the Internet's
transformation of traditional business models. While many companies have built
on-line storefronts, most still view them as simply another independently
operated channel for enabling transactions and interacting with customers.
This business model prevents the new on-line business from capitalizing on the
power of the enterprise's existing assets. To capture the full potential of
the Internet and maximize customer value, companies must view the Internet as
a principal means of fundamentally redefining the way they develop customer
relationships, manage brand names and build a sustainable competitive
advantage. The transformation
29
<PAGE>
to a "bricks and clicks" business model, in which a company's existing assets
are integrated with a digital strategy, is particularly challenging for large
businesses that have made significant investments in existing sales forces,
marketing strategies, brand names, supply chain management systems,
distribution channels, and data management systems. However, it is also these
companies that stand to gain the most from a fully integrated "bricks and
clicks" business model that transforms customer relationships.
At a time when companies need a service provider to do more than build a Web
site or enable on-line transactions, we believe few Internet professional
services providers have the depth of resources and range of services necessary
to address the large scale engagements and demands of Fortune 100 companies on
an ongoing basis. For instance, marketing firms typically provide off-line or
on-line services, but not both. Web design firms typically specialize only in
the front-end design of on-line storefronts. Similarly, traditional information
technology service providers typically focus only on the enhancement of legacy
systems and the implementation of traditional business applications. Strategic
consulting firms typically provide high level recommendations but are not held
accountable for implementation or results. Finally, Internet professional
service providers typically build e-commerce business systems in which on-line
business is conducted independently of the rest of the company and without the
benefit of the company's traditional assets.
We believe that in the new digital economy there is a need for an innovative
Internet professional services provider that has the scale, breadth of
experience and expertise to help companies understand and develop the potential
of the Internet as a part of their overall business strategy and to leverage
the power of their existing assets to drive growth, maximize customer value and
build a sustainable competitive advantage.
The Digitas Solution
We help our clients transform their businesses and customer relationships by
developing and implementing strategies to build on-line business solutions
linked to their traditional assets. We serve as a primary strategic partner to
our clients and utilize our strategic insight, marketing expertise, creativity
and execution skills to help them evaluate their business strategy, the value
they offer to their customers, their brand and the initiatives required to
succeed in the marketplace. We work with our clients to create a seamless
customer experience across all points of contact so that our clients can
develop higher value, long-term customer relationships. In addition, we seek to
quantify the value our solutions create and thereby enable our clients to
measure their return on investment. As a result of our broad-based perspective
and partnership approach, we have been able to couple development of
overarching interactive strategies with fast-paced execution that change the
way our clients acquire new customers, increase brand loyalty and build a
competitive economic model.
In redefining a client's business model, we provide a fully-integrated, end-
to-end solution, the key elements of which are illustrated in the following
chart:
"Bricks and Clicks" Business Integration
[CHART APPEARS HERE]
30
<PAGE>
Define digital business strategy. We help our clients understand the impact
of the Internet on their core business models and define new business
strategies for the digital economy. Rather than focusing on a narrow
technology or marketing strategy, or the implementation of a single project,
we employ a broad-based approach grounded in a thorough understanding of our
clients' overall business strategy and competitive environment. We work with
members of our clients' senior management who are committed to transforming
their business strategies and organizations.
Create enterprise-wide customer value propositions. Based on these new
strategies, we help our clients develop new customer value propositions that
involve more than creating attractive on-line storefronts. We seek to enhance
customer loyalty and generate new business opportunities by taking advantage
of existing assets such as distribution channels, customer service networks
and customer information systems. We believe that our customer-centric
approach allows us to deliver solutions that create economic value for our
clients.
Build new technology and customer-facing infrastructure. Our solutions
often require us to build new technology and infrastructures for our clients.
As part of our solution, we develop creative Web sites that enhance our
clients' brands and build and integrate electronic customer relationship
management, or eCRM, systems databases that are designed to manage customer
relationships. In developing new infrastructures, we also create links to
legacy information systems and other existing infrastructure.
Implement solutions across client enterprise. Solutions are most effective
when they are implemented consistently throughout a client's organization. We
help our clients implement solutions across their enterprises by providing
appropriate training, organizational alignment and support. We coordinate the
efforts of various client businesses to create customer oriented applications
with a consistent corporate message. We also create and execute customized
pilot programs designed to test our solutions prior to implementation across
the enterprise.
Develop integrated marketing plan. We design integrated marketing plans
that typically involve identifying customer segments, developing marketing
strategies and optimizing on-line media planning and channel allocation,
including mix, messaging and frequency.
Execute across marketing and service channels. We leverage our on-line
media buying, design and creative services and event sponsorships to market
seamlessly across multiple channels to help our clients build relationships
with their customers.
Performance measurement. Through every step of our solution, we measure the
value being delivered to our clients. We continually work with our clients to
determine the relevant metrics and our performance against those metrics. We
collect data frequently and use it to continually refine our solution and
maximize our clients' return on investment.
Strategy
We intend to be the leading provider of digital strategy, technology and
infrastructure and integrated marketing solutions to industry-leading
companies. Our strategies for achieving this objective are as follows:
Expand relationships with our existing clients. Our current client list
includes industry leaders with whom we have developed multi-year, large-scale
relationships. In 1999, approximately 86% of our revenue came from clients
with whom we have previously worked. We believe there are significant
opportunities for additional growth with our existing clients as they
transform their businesses and we add additional capabilities.
Select additional industry leading clients to build new long-term client
relationships. We will seek relationships with additional industry leading
companies which we believe will be successful in the digital economy. These
companies could include additional Fortune 100 companies or emerging
companies, including "dot-coms," which are poised to be leaders in their
industries. In developing new client relationships, we will
31
<PAGE>
continue to be highly selective and will seek industry leading clients who are
committed to a long-term and close working relationship with us. We believe
that our focus on industry leading companies provides us with the best
opportunities to leverage the depth of our expertise, attract outstanding
professionals, enhance our reputation and have an impact on the industries in
which our clients' operate.
Maintain focus on large-scale, long-term relationships. We will maintain
our focus on large-scale, long-term client relationships. This strategy allows
us to build in-depth, client-specific knowledge, create more fully integrated
solutions and develop closer partnerships with our clients. We are also
extremely focused on quality, and working on a small number of long-term,
large-scale engagements allows us to devote the time and resources necessary
to develop innovative solutions which fully satisfy the needs of our clients.
Maintain and grow a creative corporate culture. We have created a corporate
culture that attracts intelligent, motivated individuals and fosters
creativity and innovation. To retain this culture and uphold our high
standards of quality as we grow our business, we must continue to attract and
retain qualified individuals with superior creative, technological and
management skills. By hiring talented individuals and providing them with
relevant training and support, we believe we have created a scalable hiring
strategy without compromising our high standards.
Expand and enhance our capabilities. We believe there is a significant
opportunity to further extend our client relationships by providing new on-
line and off-line services and capabilities to our new and existing clients.
We intend to expand our capabilities in a number of areas including wireless
applications, Internet workflow management, measurement tools, analytical
capabilities and channel optimization. Towards this end, we have a dedicated
team of technical specialists who evaluate new technologies and unique
applications for these technologies.
Broaden our global reach. We seek to further broaden our global presence by
opening new offices in strategic locations. We currently expect to open two
new offices in 2000 to support our international efforts. We believe that we
need to have a local presence in key markets to meet the needs of our
multinational clients both globally and locally. In addition, we believe our
local presence will also enable us to build new relationships with industry
leading companies in foreign markets.
Services
We provide our clients with end-to-end solutions that combine a broad range
of services in digital strategy, technology, marketing and measurement. The
following table is a brief summary of our capabilities in our four service
categories.
<TABLE>
<CAPTION>
Technology and Integrated Performance
Digital Strategy Infrastructure Marketing Measurement
---------------- -------------- ---------- -----------
<S> <C> <C> <C>
. Business . Web Site . Marketing Plan Development . Web Site Usability
Transformation Development Research
. e-commerce Strategy . eCRM . Media Planning and . Web Site Performance
Buying and Diagnostics
. Enterprise Customer . User Interface Design . On-line and Off-line . Consolidated Cross-
Management Creative Channel Reporting
. Operating Model . Customer Database . Events, Partnerships . Data Analytics
Definition Development and Promotions
. Application . Channel Optimization
Development
. Solutions Integration
</TABLE>
32
<PAGE>
Digital Strategy
We work closely with our clients' senior management to gain an in-depth
understanding of their enterprise-wide business objectives and competitive
environment. This knowledge is used as the basis for establishing business
strategies that capitalize on the power of the Internet to build customer
value propositions and improve our clients' competitive positions in the
digital economy. Our digital strategy capabilities include the following:
Business transformation. We analyze our clients' existing assets and value
chain to identify opportunities for a digital strategy. We then utilize our
expertise in technology, infrastructure, customer experience, and integrated
marketing to identify the economic rationale and create a detailed plan of
action to effect fundamental business transformation.
e-commerce strategy. We define and develop the most effective strategy for
marketing, transacting and distributing products and services over the
Internet. This may include enabling direct customer transactions or supporting
the off-line channel sales cycle.
Enterprise customer management. We define and develop a consistent and
branded relevant customer experience across all points of contact to create
value for both our clients and their customers. We also identify opportunities
for collecting and leveraging customer data to create and enhance customer
value propositions and returns on investments for the clients' businesses.
Operating model definition. We define new organizational structures,
business processes and management systems that are required to successfully
execute the digital strategy, and we integrate these into the existing
business. We also examine existing operational practices to identify
opportunities to improve services and reduce costs.
Technology and Infrastructure
We identify and implement innovative technology solutions within the broad
strategic context of our clients' businesses. We design the required
technology and infrastructure and select and manage external vendors to
support seamless dialogue and data management across marketing channels. We
also provide training and process management, organizational alignment and
channel implementation support. Our specific technology and infrastructure
capabilities include the following:
Web site development. We build on-line value propositions for our clients
by designing and developing large-scale, complex e-commerce enabled Web sites
that utilize state of the art technologies and leverage existing assets.
Electronic customer relationship management (eCRM). We develop and
implement customized applications to assist clients in building a seamless,
interactive and value-based dialogue with their customers across all
distribution channels and geographies. We also implement customized software
applications to manage marketing campaigns. We try to remain abreast of the
latest tools and technologies available to help manage customer relationships
and ensure that our clients are industry leaders in using these technologies.
User interface design. We design and develop functional, user-friendly Web
sites, navigation systems and graphical user interfaces to create a positive
customer experience and effectively meet our clients' specific business
objectives.
Customer database development. We design and develop customer databases to
collect and analyze customer profile information, including demographic
information, on-line and off-line transactional history and Web use patterns.
The databases are designed to allow increased access to information across all
marketing channels and thereby optimize customer interaction.
33
<PAGE>
Application development. We create customized applications, such as
proprietary content databases, specialized search functions and registration
engines, to improve customer interactions with our clients' businesses.
Solutions integration. We frequently select and manage third party vendors
to assist our clients in integrating existing enterprise/legacy systems with
new Web and eCRM applications.
Integrated Marketing
Our extensive marketing, media and creative capabilities and experience
allow us to deliver measurable increases in customer value and loyalty through
innovative marketing solutions powered by customer insight, marketing
analytics and operational expertise. Our marketing capabilities include the
following:
Marketing plan development. We develop integrated, measurable, marketing
campaigns across all direct customer channels, including Web, teleservices,
advertising and direct response channels.
Media planning and buying. We design media campaigns across all channels
and allocate client expenditures to optimize customer response. We are a large
purchaser of on-line media, which enables us to negotiate discounts which we
pass on to our clients.
On-line and off-line creative. We leverage our creative expertise in
marketing executions across numerous channels, clients and technologies. We
provide creative services to assist our clients in branding and marketing
their products and services through both on-line channels, such as e-mail,
Internet, and intranet, and off-line channels, such as teleservices, direct
response, print and television, catalogues and direct mail.
Events, partnerships and promotions. We plan events and negotiate
partnerships and promotions that reinforce brand attributes, generate customer
interest and improve business results.
Performance Measurement
Performance measurement quantifies the results of our solutions to
determine their effectiveness and to illustrate to clients their return on
investment. We leverage our direct marketing heritage, extensive array of
proprietary methodologies and working relationships with other measurement
tool providers to provide meaningful measurement of the impact our solutions
have on our clients' businesses. Our specific measurement capabilities
include:
Web site usability research. Through rapid prototyping and live customer
feedback, we identify opportunities to optimize Web site usability prior to
the launch of our clients' Web sites.
Web site performance and diagnostics. We measure the overall effectiveness
of a Web site with its targeted users and identify areas for potential
upgrades.
Consolidated cross-channel reporting. We design reporting strategy and
infrastructure and implement integrated management reporting systems across
our clients' businesses.
Data analytics. We analyze customer behavior and transactional data to
improve effective targeting, messaging, and personalization.
Channel optimization. We measure performance across multiple marketing and
distribution channels to ensure ongoing optimization of marketing resources.
34
<PAGE>
Clients, Marketing and Sales
We primarily market our services to Fortune 100 and other industry leading
companies. We seek clients that are committed at senior levels to building
long-term partnerships with us to leverage their existing traditional asset
bases to take advantage of the Internet's significant new opportunities for
customer interaction. We are also seeking to work with Internet-based companies
to enhance their customer relationships. In particular, we seek to work with
companies operating in industries in which the economics of customer loyalty
are most compelling, thereby providing us with the opportunity to greatly
impact market share and the return on their customer base investments. These
industries include financial and consulting services, software, technology and
telecommunications, travel and leisure, industrial and consumer brands and
retail.
Our current clients include, among others, the following companies:
<TABLE>
<S> <C>
Aetna Dell Computer Corporation
American Electric Power General Motors
American Express Harcourt
Aquent Johnson & Johnson
AT&T L.L. Bean
Bausch & Lomb Morgan Stanley Dean Witter
Charles Schwab & Co. Inc. Neiman Marcus
</TABLE>
Our results of operations and our business depend on our relationship with a
limited number of large clients. In 1999, our revenue was derived from 38
clients. Of our total revenues during 1999, General Motors accounted for
approximately 23%, American Express accounted for approximately 22% and AT&T
accounted for approximately 17%.
We do not have a separate sales and marketing force. Rather, our
relationship managers are primarily responsible for our marketing and sales
efforts. Members of our senior management team also market our services through
their speaking engagements at industry conferences. Additionally, we rely on
our strong reputation, quality client base and proven results to retain our
existing clients and develop new client relationships. In fact, many of our
existing clients have recommended our services to potential clients.
Client Case Studies
American Express
American Express is a world leader in charge and credit cards, travel-
related services, financial planning, investment products, insurance and
international banking. It has built one of the world's preeminent service
brands.
Digitas began its relationship with American Express in 1981 by working on
direct marketing programs. In May 1998, we expanded our relationship with
American Express by working on various aspects of its Web site. Examples of
specific initiatives include:
. User interface and ease of navigation. We helped American Express
implement a customer-centric navigation approach that segmented
personal, small business, and corporate customers to address the needs
of each group separately. This new approach created a single user
experience across all American Express business units.
. "MyAmex". We worked with American Express to create and deploy "MyAmex"
as a customer's personalized gateway to the company, allowing quick
access to those elements of site content and functionality most relevant
to individual customers.
. Web site templates. We partnered with American Express to develop style
guide standards that would be used for all site design across
americanexpress.com on a global basis. More specifically, we designed
templates and components that we built into American Express' new
content management utility.
35
<PAGE>
. Blue from American Express. We helped design and implement a marketing
campaign for the company's new Blue credit card offering utilizing both
direct mail and on-line marketing channels. This included assisting in
the development of a lifecycle management strategy, designing and
implementing an on-line simulcast of a concert in Central Park to launch
Blue, and creating the blue.com site.
. Measurement engine. We worked with American Express to develop a
measurement plan and select a reporting utility to measure performance
across americanexpress.com, including the initial reporting templates.
We continue to work with American Express as its principal interactive
agency for direct and on-line marketing initiatives.
General Motors
General Motors Corporation is the world's largest full-line vehicle
manufacturer. General Motors invests significant amounts each year on
"Customer Influence" through advertising, field sales and dealer support,
sales incentives, relationship marketing, event sponsorship and promotional
activities. General Motors has recognized, however, that the Internet is
transforming the vehicle manufacturing, distribution, and sales landscape and
that these traditional methods of customer influence must be integrated into
the digital world to remain effective.
Over the past three years, Digitas has developed a broad and deep strategic
and operational partnership with numerous business units of General Motors to
help capture the power of the digital economy and leverage the value of their
traditional marketing investments and assets. The following descriptions
illustrate two isolated segments of our broad strategic relationship with
General Motors.
Enterprise customer management
At the beginning of the second quarter of 1998, we began working with
General Motors' Corporate Advertising and Marketing Group to do the following:
. Develop vision and digital strategy. We created an executive strategy
for customer relationship management, which became the founding charter
of General Motors' Global Enterprise Customer Management Group
established in January 1999.
. Plan and execute marketing planning programs. Over the past year, we
have designed and implemented cross-divisional, channel integrated
marketing programs at both the regional and national levels.
. Design customer management system database. We designed General Motors'
centralized household vehicle customer database, which enabled General
Motors to identify significant customer and prospect opportunities, use
a single platform for common measurement and collect and store
information about customer behavior.
. Build multi-channel lead management system. We designed and managed the
construction of an automated lead management system which provides
General Motors' national and regional enterprise customer management and
divisional marketing initiatives with tracking, treatment, and
measurement capabilities.
. Design and implement new marketing segmentation and measurement
processes. To help General Motors take full advantage of the new
strategies and systems introduced, we implemented new processes for
modeling and segmenting the customer and prospect base and for managing
marketing investments to assist General Motors in planning, executing,
measuring and continually improving its multi-channel initiatives.
36
<PAGE>
Pontiac GMC vehicle division
We have completed approximately 125 initiatives for Pontiac GMC, many of
which are of similar scope and style to the two Pontiac initiatives described
below.
. Aztek pre-launch Web site and reporting. The Aztek Web site was an on-
line experiment designed to test a new and more efficient way of
introducing new vehicles to the market and to pioneer the use of
customer feedback in the design of vehicles. Pontiac previewed the
concept car at the 1999 Detroit Auto Show. To leverage the resulting
media attention, Digitas built a Web site and collected on-line audience
comments and feedback. As a result, Pontiac gained real-time knowledge
of customer impressions and preferences. This information drove further
evaluation of the vehicle design and will, ultimately, influence the
consumer launch of the car.
. Sunfire eCare program. Pontiac targets young, first-time car buyers with
its Sunfire model. To provide proactive and reactive customer care for
this valuable demographic group, we implemented an innovative Web site
which incorporates a real-time chat/call center to answer first time
purchasers' questions. Call center agents can provide a caller with
information and images in real time on a caller's computer, making
communications more informative and valuable and potentially resulting
in more sales.
General Motors reports that, as a result of our work to date, including the
replacement of multiple, redundant legacy database systems with a centralized
enterprise management system, it has seen improved customer loyalty, higher
customer conversion rates, lower costs to acquire new or re-gain former
customers, greater incremental sales per dollar invested, and an increasing
number of cross-sales. Through our interactive relationship, Digitas has
helped Pontiac become one of the leading General Motors divisions in terms of
Internet use. Although our relationship with General Motors is already very
large, we believe it is in its early stages and has both opportunities for
continued growth within our current relationships as well as opportunities for
additional relationships with other divisions.
Neiman Marcus Group
As a leader in the luxury fashion and apparel industry, Neiman Marcus has
built an enviable customer franchise by offering world renowned designer
brands and providing a best-in-class personalized shopping experience. In
early 1999, Neiman Marcus decided to take advantage of the opportunities
offered by the Internet to reach new customers and to enhance its
relationships with existing customers.
In April 1999, Neiman Marcus Group retained Digitas as its overall
strategic and tactical partner to help define their digital strategy. The
solution we offered included the following:
. Develop digital strategy. We worked with Neiman Marcus to define a
digital strategy which leveraged the Neiman Marcus brand to establish
Neiman Marcus as the premier lifestyle platform for affluent consumers
on the Web. Our strategy was to establish for Neiman Marcus a complete
e-commerce organization which included neimanmarcus.com, a Web site that
is fully integrated with the existing Neiman Marcus store and catalogue
businesses.
. Develop creative and innovative Web site. We focused our creative
efforts on developing a Web site that both offers users a high-end
shopping experience and enhances the Neiman Marcus brand name. The Web
site offers customers an easy to use interface, quick transaction times
and information concerning specific product availability. To set the
standard in on-line service while taking advantage of existing store
inventory and fashion expertise, we worked with Neiman Marcus to develop
the Neiman Marcus Virtual Studio. The Studio uses new interactive and
visual telepresence technology for virtual merchandising and live
assistance to connect customers with store associates. Users can either
phone, e-mail, or chat on-line in real-time with sales associates.
. Design and build e-commerce infrastructure. We worked with Neiman Marcus
to design and build an e-commerce organization and technology
infrastructure that included merchandising, content management, eCare
and site management processes. In addition, we integrated the Web site
with catalogue and store databases to promote seamless customer service.
37
<PAGE>
. Coordinated cross-channel Web marketing campaign. We worked with Neiman
Marcus to design a comprehensive cross-channel Web marketing campaign
which utilized on-line and off-line techniques to drive customers to the
Neiman Marcus Web site and which was coordinated with existing customer
mailings, special in store and top customer events, and banner ads and
sponsorships.
Through the implementation of our solution, we believe that Neiman Marcus
will be able to penetrate geographic locations not served by its stores and
improve its operating efficiency, marketing results and the quality of service
provided to its customers. The integration of the store, catalogue and Web
databases should permit Neiman Marcus to target past customers more
effectively, enhance existing customer relationships and achieve significant
cost savings. We are continuing to work with the senior management of Neiman
Marcus to further refine and build upon its digital strategy, migrate more of
its systems to the Web, improve the existing Web site and more effectively
target and service its customer base.
Competition
Competition in the Internet professional services industry is intense. We
compete with companies that offer strategic consulting, Web design,
information technology and e-commerce services as well as the in-house
development efforts of many companies. Our current competitors include the
following:
. web consulting firms and on-line agencies, such as Agency.com, Diamond
Technology Partners, iXL Enterprises, Proxicom, Razorfish, Scient,
USWeb/CKS and US Interactive;
. general management consulting firms, such as Bain & Company, Booz Allen
& Hamilton, Boston Consulting Group and McKinsey & Company;
. advertising and direct marketing agencies, such as Ogilvy One and
Wunderman Cato Johnson;
. systems integrators that primarily engage in fixed-time/fixed-fee
contracts, such as Cambridge Technology Partners, Sapient and Viant;
. large systems integrators, such as Andersen Consulting and the
consulting arms of the "Big Five" accounting firms;
. the professional services groups of computer equipment companies, such
as IBM Global Services;
. outsourcing firms, such as Computer Sciences Corporation, Electronic
Data Systems and Perot Systems; and
. internal information technology departments of current and potential
clients.
Because relatively low barriers to entry characterize our industry, we also
expect other companies to enter our market.
We believe that the principal competitive factors in our industry are:
. quality of services;
. technical and strategic expertise;
. ability to provide end-to-end solutions;
. speed of development and implementation of Internet solutions;
. value of the services provided compared to the price of such services;
. reputation and experience of professionals delivering the service;
. project management capabilities;
. brand recognition and size of the firm; and
. effectiveness of sales and marketing efforts.
38
<PAGE>
We believe that we presently compete favorably with respect to most of these
factors. In particular, we believe that we offer an integrated set of skills
and expertise that many existing service providers are not well suited to
provide. However, the market for Internet professional services is evolving
and we cannot be certain that we will compete successfully in the future. We
expect that competition will continue to intensify and increase in the future,
particularly if large information technology consulting firms focus more
resources on Internet solution opportunities.
People and Culture
We believe we have an entrepreneurial culture in which creativity, teamwork
and individual development are strongly encouraged. Our employees are our
single greatest asset and the key to reaching our company-wide goal to be the
undisputed industry leader in Internet professional services. In furtherance
of this mission all of our employees collaborate to apply their creativity in
the conception, design, and implementation of innovative client solutions. Our
formal training program, to which we allocate substantial financial resources
and personnel, emphasizes improvement of individual skills as well as
optimization of team performance. We also conduct shared learning sessions in
which business and technological developments are discussed amongst the
various teams. Through the training and shared learning programs we continue
to bolster the talent and expertise of our employees which in turn improves
our Internet professional services capabilities. The end result is a dynamic
and rewarding work environment for intelligent, motivated individuals.
Our training program is part of a larger core competency model instituted
in 1998 that is intended to incorporate the personal interests and career
goals of each employee with their individual development and team performance
training. Employees meet with a staffing officer to discuss their interests
and goals and thereby allow us to assign them to client teams which they will
find to be the most satisfying. We believe that our ongoing solicitation and
consideration of individual interests and goals enables us to improve the
attractiveness of the work environment to our employees and strengthens each
working group thereby further improving our competitive position in the
industry.
To retain this culture and uphold the high standard of quality work that we
have set, we must continue to attract qualified individuals with superior
strategic, creative, technological and management skills in numbers sufficient
to meet the growing demands for our services. To this end, we have a dedicated
recruiting team of 28 individuals that utilizes various methods to attract the
most talented and promising professionals, including job boards, advertising
in newspapers and trade magazines, college and business school recruiting,
competitive targeting and an internal referral bonus program. In addition, we
retain recruiting professionals to supplement the recruiting efforts of our
in-house recruiting team. We recognize that the demand for Internet
professional services, however, is growing faster than the number of trained
professionals who are capable of providing those services and, therefore,
retention and training of existing employees is very important. By hiring
intelligent individuals and then providing them with relevant training and
support, we believe that we have created a truly scalable hiring strategy
without compromising our high standards.
We provide our employees with a competitive base salary, performance driven
incentive programs, stock options in Digitas and comprehensive benefits
packages. Employees are rewarded for individual as well as team performance
and the success of their clients in the marketplace. For many of our
employees, however, a significant attraction is being part of a winning team
that applies industry leading expertise and technology to transform businesses
to be the best in their industry.
As of January 31, 2000, we had approximately 1,240 full-time employees,
approximately 1,200 of whom were located in the United States and 40 of whom
were located in Europe. Our employees include approximately 180 digital
strategy consultants, 280 technology professionals, 260 design and creative
professionals, 310 integrated marketing managers, and 210 executive and
support personnel.
Our employees are not represented by any union and, except for senior
management and certain other employees, are retained on an at-will basis.
However, the regulations of some European countries in which we
39
<PAGE>
operate may make it difficult for us to terminate employees in those
countries. In addition, those regulations govern the amount of vacation time
that must be given to employees, which is significantly more vacation than in
the United States.
Intellectual Property Rights
We seek to protect our intellectual property through a combination of
license agreements and trademark, service mark, copyright and trade secret
laws. We enter into confidentiality agreements with our employees and clients
and use our best efforts to limit access to and distribution of proprietary
information licensed from third parties.
We pursue the protection of our trademarks in the United States and
internationally. We obtained a U.S. trademark registration for Bronner
Slosberg Humphrey on November 23, 1999. We filed applications for trademark
registration of Bronnercom and BSH on April 5, 1999, Digitas on December 13,
1999, Reveloce and Reveloce Interactive on December 16, 1999, Sansome on April
5, 1999, The Sansome Group on January 26, 1999, SIG on April 5, 1999,
Signition on December 15, 1999 and Strategic Interactive Group on September
29, 1999. In the United Kingdom we filed applications for trademark
registration of Bronner Slosberg Humphrey on July 9, 1999, Bronnercom on June
24, 1999, Digitas on December 23, 1999 and Strategic Interactive Group on July
1, 1999.
Our efforts to protect our intellectual property rights could be inadequate
to deter misappropriation of proprietary information. For example, we may not
detect unauthorized use of our intellectual property. In addition, the legal
status of intellectual property on the Internet is currently subject to
various uncertainties. See "Risk Factors--We may not be able to protect our
intellectual property and proprietary rights" and "Risk Factors--Changes in
government regulation of the Internet could adversely affect our business."
U.S. and Foreign Government Regulation
Congress has recently passed legislation that regulates various aspects of
the Internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and
jurisdiction. In addition, federal, state, local and foreign governmental
organizations also are considering, and may consider in the future, other
legislative and regulatory proposals that would regulate the Internet. Areas
of potential regulation include libel, pricing, quality of products and
services and intellectual property ownership.
The European Union also has recently enacted several directives relating to
the Internet. In order to safeguard against the spread of illegal and socially
harmful materials on the Internet, the European Union has adopted the "Action
Plan on Promoting the Safe Use of the Internet." Other European Commission
directives address the regulation of privacy, e-commerce, security, commercial
piracy, consumer protection and taxation of transactions completed over the
Internet.
It is not known how courts will interpret both existing and new laws.
Therefore, we are uncertain as to how new laws or the application of existing
laws will affect our business. In addition, our business may be indirectly
affected by our clients who may be subject to such legislation. Increased
regulation of the Internet may decrease the growth in the use of the Internet,
which could decrease the demand for our services, increase our cost of doing
business or otherwise have a material adverse effect on our business, results
of operations and financial condition. See "Risk Factors--Changes in
government regulation of the Internet could adversely affect our business.
Facilities
Our headquarters and principal administrative and finance operations are
located in a leased facility in Boston, Massachusetts consisting of
approximately 200,000 square feet of office space. The lease for this office
space expires in November 2005. We also occupy office space in locations in
New York City under three separate leases. One of the leases covers
approximately 12,000 square feet of office space and expires in September
2002. The second and third New York leases cover an aggregate of approximately
38,000 square feet in the same building and expire in September 2004 and
September 2002. Due to our growth, in November 1999 we executed a fourth lease
for 132,000 square feet in a new New York City location. That lease expires in
March 2011. We anticipate relocating all of our New York staff to the new
larger location in September or October 2000. We will continue to
40
<PAGE>
be obligated on our existing leases and will need to sublet these leases to
minimize cost and financial obligations. At this time, we cannot be certain
that we will be able to execute subleases that coincide with our move or that
the terms of the subleases will completely offset our costs. We also lease
office space in San Francisco under a lease that expires in January 2010. In
addition, we have leases for office space in London and Salt Lake City that
each expire in September 2004.
Legal Proceedings
We are not a party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages and positions as of
January 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Director, Chairman and Chief Executive
David W. Kenny.............. 38 Officer
Kathleen L. Biro............ 47 Director, Vice Chairman and President
Robert Galford.............. 47 Chief People Officer
Michael Goss................ 40 Chief Financial Officer and Treasurer
General Counsel, Secretary and Assistant
Marschall I. Smith.......... 55 Treasurer
Michael Ward................ 36 Chief Operating Officer
Michael E. Bronner.......... 40 Director, Chairman Emeritus and Founder
John L. Bunce, Jr........... 41 Director
Orit Gadiesh (1)(2)......... 48 Director
Philip U. Hammarskjold (2).. 34 Director
Patrick J. Healy (1)........ 33 Director
Arthur Kern (1)(2).......... 53 Director
</TABLE>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
David W. Kenny was named Chief Executive Officer of Digitas in September
1997 and Chairman in December 1999. He joined Digitas as a director and Vice
Chairman in January 1997. From 1991 to 1997, Mr. Kenny was a partner at Bain &
Company, a strategy consulting firm, and was named to its Policy Committee in
1995. Mr. Kenny also serves as a director of Harvard Business School
Publishing, The Corporate Executive Board and Teach for America. He holds a
B.S. degree from the General Motors Institute and an M.B.A. from Harvard
Business School.
Kathleen L. Biro joined Digitas in 1991 and has served as President and a
director since December 1999 and as Vice Chairman since April 1999. Ms. Biro,
together with Robert Cosinuke and Ruben Pinchanski, founded Strategic
Interactive Group and served as its Chief Executive Officer from its founding
in April 1995 to December 1999. Prior to joining Digitas in 1991, Ms. Biro
served as Senior Vice President of Global Product Management for Bankers Trust
Global Operations and Information Systems business. Ms. Biro also sits on the
boards of directors of net.Genesis and Be Free. She holds a B.S. and an M.S.
in Educational Administration from New York University and an M.B.A. in
Marketing and Finance from the Columbia University Graduate School of
Business.
Robert Galford joined Digitas in January 2000 as Chief People Officer. From
January 1994 to January 2000 Mr. Galford served as managing director of
Counsel to Management and as an adjunct faculty member of Columbia University
Graduate School of Business. Prior to 1994, Mr. Galford served as a vice
president of The MAC Group/Gemini Consulting. Mr. Galford is a member of the
board of directors of Forrester Research, Inc. and Access Data Corporation.
Mr. Galford holds a J.D. from Georgetown University Law Center, an M.B.A. from
Harvard Business School and a B.A. from Haverford College.
Michael Goss has served as Chief Financial Officer and Treasurer of Digitas
since January 2000. From December 1994 to January 2000 Mr. Goss served as a
director and as the Chief Financial Officer of Playtex Products, Inc. Prior to
December 1994, Mr. Goss served as Vice President Corporate Development and
Treasurer of Oak Industries, Inc. Mr. Goss has an M.B.A. from Harvard Business
School and a B.A. from Kansas State University.
42
<PAGE>
Marschall I. Smith joined Digitas in October 1999 as General Counsel and
Secretary. From February 1994 to October 1999, Mr. Smith was associated with
Hamilton Holmes Associates, a financial and legal services consulting firm,
and served as Senior Vice President and General Counsel of IMC Global, Inc., a
mining and chemical manufacturer in Northbrook, Illinois. Mr. Smith holds an
A.B. from Princeton University, a J.D. from the University of Virginia Law
School and an M.B.A. from the University of Chicago Graduate School of
Business.
Michael Ward has served as Chief Operating Officer of Digitas since March
1998. Mr. Ward joined Digitas in August 1997 as a Senior Vice President. Prior
to that, he was associated with Bain & Company, a strategy consulting firm,
since December 1994. Mr. Ward holds B.S. and B.A. degrees from the University
of Pennsylvania and an M.B.A. from the Amos Tuck School at Dartmouth College.
Michael E. Bronner founded Digitas in 1980 and served as Chief Executive
Officer until September 1997 and Chairman until December 1999. Mr. Bronner is
currently a director and Chairman Emeritus of Digitas. Mr. Bronner is
currently the Chairman and founder of Lifetime Rewards.com. Mr. Bronner is
also Chairman of the Boston Walk Committee for the March of Dimes and serves
as a director of the Boys and Girls Clubs, the Boston Public Library
Foundation and the New England Aquarium.
John L. Bunce, Jr. has served as a director of Digitas since January 1999.
Mr. Bunce joined the predecessor to Hellman & Friedman LLC in 1988, became
partner of that entity in January 1996 and has served as a Managing Director
of Hellman & Friedman LLC since January 1998. He also serves on the boards of
directors of National Information Consortium and Western Wireless Corporation.
Mr. Bunce holds a B.A. from Stanford and an M.B.A. from Harvard Business
School.
Orit Gadiesh has served as a director of Digitas since February 1999. Ms.
Gadiesh has served as the Chairman of the Board of Bain & Company, a strategy
consulting firm, since December 1994. Ms. Gadiesh is a board of directors and
council member at the Harvard Business School, the Wharton School, the Kellogg
School and the Harvard Business School Press Publications Review Board. She is
also a member of the Greater Boston Chamber of Commerce and the Massachusetts
Business Roundtable. She holds a B.A. from Hebrew University, Jerusalem, and
an M.B.A. from Harvard Business School.
Philip U. Hammarskjold has served as a director of Digitas since December
1999. Mr. Hammarskjold joined the predecessor to Hellman & Friedman LLC in
1992, became partner of that entity in January 1996 and has been a Managing
Director of Hellman & Friedman LLC since January 1998. He has served on the
board of directors of The Covenant Group, Inc. since 1995 and served on the
board of directors of Young & Rubicam Inc. from December 1996 to December
1999. Mr. Hammarskjold holds a B.S.E. from Princeton University and an M.B.A.
from Harvard Business School.
Patrick J. Healy has served as a director of Digitas since January 1999.
Mr. Healy has been employed by Hellman & Friedman LLC since 1994 and has
served as a Managing Director since January 1999. He serves on the board of
directors of National Information Consortium, Inc. Mr. Healy holds an A.B.
from Harvard College and an M.B.A. from Harvard Business School.
Arthur Kern has served as a director of Digitas since January 1999. Prior
to investing in media and marketing services companies, he was co-founder and
Chief Executive Officer of American Media, a group owner of commercial radio
stations sold to AMFM (Chancellor Broadcasting) in 1994. Mr. Kern serves on
the boards of directors of Yahoo!, Inc. and Northwest Broadcasting, a
privately held company that owns and operates Fox Television affiliates in the
Northwest. Mr. Kern holds a B.A. from Yale University.
43
<PAGE>
Board Composition
The number of our directors is currently fixed at eight. Following the
closing of this offering, our board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. Our
board of directors will consist of three Class I directors, whose term of
office will continue until the 2001 annual meeting of shareholders, two Class
II directors, whose term of office will continue until the 2002 annual meeting
of shareholders, and three Class III directors, whose term of office will
continue until the 2003 annual meeting of shareholders. The Class I directors
will be John L. Bunce, Jr., David W. Kenny and Arthur Kern; the Class II
directors will be Orit Gadiesh and Patrick J. Healy; and the Class III
directors will be Kathleen L. Biro, Michael E. Bronner and Philip U.
Hammarskjold. At each annual meeting of shareholders, a class of directors
will be elected for a three-year term to succeed the directors of the same
class whose terms are then expiring.
There are no family relationships among any of our directors or executive
officers.
Board Committees
Audit Committee. The members of the audit committee, a majority of whom are
independent directors, are responsible for recommending to the board of
directors the engagement of our outside auditors and reviewing our accounting
controls and the results and scope of audits and other services provided by
our auditors. The audit committee consists of Messrs. Hammarskjold, Chairman,
and Kern and Ms. Gadiesh.
Compensation Committee. The members of the compensation committee, a
majority of whom are independent directors, are responsible for reviewing and
recommending to the board of directors the amount and type of consideration to
be paid to senior management, administering our stock plans and establishing
and reviewing general policies relating to compensation and benefits of
employees. The compensation committee consists of Messrs. Healy and Kern,
Chairman, and Ms. Gadiesh.
Director Compensation
Directors who are employees receive no additional compensation for their
services as directors. Non-employee directors do not currently receive a fee
for their service as directors, although the board of directors may in the
future decide to pay non-employee directors a fee for their services. We
reimburse our directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. Non-employee directors are also
eligible to participate in our stock option plans. Since their election to the
board of directors, we have granted to each of Messrs. Bronner and Kern and
Ms. Gadiesh non-qualified options to purchase 156,000 shares of our common
stock. The options granted to Mr. Kern and Ms. Gadiesh were granted on June 1,
1999, have an exercise price of $2.52 per share and become exercisable in full
on June 1, 2002, regardless of whether the director is serving as a director
of Digitas at that time. The options granted to Mr. Bronner were granted on
December 2, 1999, have an exercise price of $8.75 per share and become
exercisable in full on December 2, 2002, regardless of whether Mr. Bronner is
serving as a director of Digitas at that time.
Executive Compensation
The following table sets forth the total compensation paid or accrued in
the year ended December 31, 1999 to our Chief Executive Officer, each of our
other executive officers whose aggregate compensation exceeded $100,000 and
one former executive officer who received total compensation in excess of
$100,000 but was not serving as an executive officer on December 31, 1999. We
refer to each of these people in this prospectus as our "named executive
officers." No other executive officer earned an aggregate of salary and bonus
in excess of $100,000 for the year ended December 31, 1999.
44
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Number of
Shares of
Underlying
Options All Other
Name and Principal Position Salary Bonus Granted(1) Compensation
- --------------------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
David W. Kenny................ $ 500,000 $ 550,000 3,300,000 $1,983,074(2)
Chairman and Chief
Executive Officer
Kathleen L. Biro.............. 420,833 425,000 1,080,000 976,236(3)
Vice Chairman and President
Michael Ward.................. 370,833 350,000 900,000 202,717(4)
Chief Operating Officer
Meryl Beckingham (5).......... 305,000 425,000(6) 330,000 593,785(7)
Former Chief Financial
Officer and Former Executive
Vice President
</TABLE>
- --------
(1) Does not include rollover options granted to the named executive officer
in connection with the recapitalization in exchange for the cancellation
of stock appreciation rights or stock options, as applicable, held by the
named executive prior to the recapitalization. Mr. Kenny received
6,000,000 rollover options and Mr. Ward received 600,000 rollover options
in connection with the recapitalization. Ms. Biro received 1,299,085
rollover options and Ms. Beckingham received 270,000 rollover options in
connection with the recapitalization.
(2) Includes:
. transaction payment in the amount of $1,977,974 paid to Mr. Kenny in
connection with the recapitalization;
. parking expenses in the amount of $4,200 paid by Digitas on behalf of
Mr. Kenny; and
. $900 representing the dollar value of insurance premiums paid by Digitas
with respect to a term life insurance policy purchased for Mr. Kenny's
benefit.
(3) Includes:
. transaction payment in the amount of $309,064 paid to Ms. Biro in
connection with the recapitalization;
. deferred compensation payment in the amount of $658,000 paid to Ms. Biro
in accordance with the terms of her employment agreement;
. parking expenses in the amount of $4,200 paid by Digitas on behalf of
Ms. Biro;
. $810 representing the dollar value of insurance premiums paid by Digitas
with respect to a term life insurance policy purchased for Ms. Biro's
benefit; and
. $4,162 representing the dollar value of insurance premiums paid for by
Digitas with respect to an individual, supplemental long-term disability
policy purchased in 1994 for Ms. Biro.
(4) Includes:
. transaction payment in the amount of $197,797 paid to Mr. Ward in
connection with the recapitalization;
. parking expenses in the amount of $4,200 paid by Digitas on behalf of
Mr. Ward; and
. $720 representing the dollar value of insurance premiums paid by Digitas
with respect to a term life insurance policy purchased for Mr. Ward's
benefit.
(5) Ms. Beckingham resigned from her position as Chief Financial Officer and
Executive Vice President effective December 15, 1999.
(6) Includes annual bonus in the amount of $175,000 and special bonuses in
the aggregate amount of $250,000 paid to Ms. Beckingham in consideration
for her services in effecting the recapitalization.
45
<PAGE>
(7) Includes:
. $500,000 payment paid to Ms. Beckingham in connection with her
resignation from Digitas;
. transaction payment in the amount of $89,009 paid to Ms. Beckingham in
connection with the recapitalization;
. parking expenses in the amount of $4,200 paid by Digitas on behalf of
Ms. Beckingham; and
. $576 representing the dollar value of insurance premiums paid by Digitas
with respect to term life insurance policy purchased for Ms.
Beckingham's benefit.
Ms. Beckingham will be entitled to receive up to an additional $420,000
between January 2000 and January 2001 in connection with her resignation from
Digitas. We also agreed to pay the cost of Ms. Beckingham's health insurance,
life insurance and long term disability insurance plans through January 31,
2000 and to provide her with other payments and benefits in connection with
her resignation.
46
<PAGE>
The following table sets forth information regarding stock options granted
during 1999 to our named executive officers. All of the options, other than
options to purchase 900,000 shares that were granted to Ms. Biro under the
1999 option plan and options to purchase 300,000 shares that were granted to
Mr. Ward under the 1999 option plan, were granted under the 1998 option plan.
All of the options are non-qualified stock options, have a ten-year term and
generally terminate 30 days after the named executive's employment with us
terminates for any reason. During 1999, we granted options to purchase an
aggregate of 14,792,000 shares of common stock to employees, excluding
rollover options to purchase an aggregate of 16,466,645 shares.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
for Option Term (2)
----------------------
Number of
Shares of
Common
Stock Percent of Total Exercise
Underlying Options Granted Price
Options to Employees in Per Expiration
Name Granted(1) Fiscal Year(%)(1) Share($) Date 5%($) 10%($)
- ---- ---------- ---------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David W. Kenny.......... 3,300,000(3) 22.31% $2.5184 1/6/09 $5,226,463 $13,244,884
Kathleen L. Biro........ 180,000(4) 1.22 2.5184 8/1/09 285,080 722,448
900,000(5) 6.08 8.75 12/2/09 4,952,545 12,550,722
Michael Ward............ 600,000(4) 4.06 2.5184 1/6/09 950,266 2,408,161
300,000(5) 2.03 8.75 12/2/09 1,650,848 4,183,574
Meryl Beckingham........ 210,000(4) 1.42 2.5184 1/6/09 332,593 842,856
120,000(4) .81 2.5184 5/1/09 190,053 481,632
</TABLE>
- --------
(1) Does not include rollover options granted to the named executive officer
in connection with the recapitalization in exchange for the cancellation
of stock appreciation rights or stock options, as applicable, held by the
named executive officer prior to the recapitalization. Mr. Kenny received
6,000,000 rollover options and Mr. Ward received 600,000 rollover options
in connection with the recapitalization. Ms. Biro received 1,299,085
rollover options and Ms. Beckingham received 270,000 rollover options in
connection with the recapitalization.
(2) Potential realizable value is based on the assumption that our common
stock appreciates at the annual rate shown, compounded annually, from the
date of grant until expiration of the ten-year term. These numbers are
calculated based on Securities and Exchange Commission requirements and
do not reflect our projection or estimate of future stock price growth.
Potential realizable values are computed by multiplying the number of
shares of common stock subject to a given option by the fair market value
on the date of grant, as determined by our board of directors, assuming
that the aggregate stock value derived from that calculation compounds at
the annual 5% or 10% rate shown in the table for the entire ten-year term
of the option and subtracting from that result the aggregate option
exercise price.
(3) Options to purchase 600,000 shares were immediately exercisable as of the
grant date. The remainder of the options vest in equal installments on
the third, fourth and fifth anniversary of the grant date.
(4) Options vest in equal installments on the third, fourth and fifth
anniversary of the grant date.
(5) Options vest 25% on the first anniversary of the grant date and
additional 6.25% on each consecutive three-month period thereafter.
47
<PAGE>
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held as of December 31, 1999
by the named executive officers. There was no public trading market for our
common stock as of December 31, 1999. Accordingly, the values of the
unexercised in-the-money options have been calculated on the basis of the fair
value at December 31, 1999 of $8.75 less the applicable exercise price,
multiplied by the number of shares acquired on exercise. None of the named
executive officers exercised any stock options in 1999.
Aggregated Option Exercises and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Underlying Unexercised Value of Unexercised
Options at Fiscal Year- In-The-Money Options
End at Fiscal Year-End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Kenny.............. 6,600,000 2,700,000 $47,553,000 $16,821,000
Kathleen L. Biro............ 1,299,085 1,080,000 9,223,505 1,121,400
Michael Ward................ 600,000 900,000 4,650,000 3,738,000
Meryl Beckingham............ 0 0 0 0
</TABLE>
1998 Option Plan
In contemplation of the recapitalization, our board of directors adopted
our 1998 option plan. The plan allows us to:
. grant incentive stock options; and
. grant non-qualified stock options.
More specifically, the plan authorized the grant of 16,466,645 rollover
options in exchange for the cancellation of stock appreciation rights and
stock options held by the SAR and option holders prior to the recapitalization
and an additional 11,744,700 options that are not rollover options. In
September 1999, the board of directors amended the plan to decrease the number
of non-rollover options that could be granted under the plan to 10,152,000
shares.
All options granted under the plan have been non-qualified stock options.
As of December 31, 1999, options to purchase 24,460,972 shares of common stock
were outstanding under the plan and 510,000 shares were available for future
grant under the plan. The board does not intend to grant any additional
options under the plan after the offering.
Grants under the plan may be made to employees and non-employee directors,
consultants and independent contractors who contribute to the management,
growth and profitability of the business of Digitas or its affiliates.
A committee of the board of directors or, if no such committee is formed,
the board of directors, administers the plan which includes determining the
participants in the plan and the number of shares of common stock to be
covered by each option, amending the terms of any option, subject to
limitations, and interpreting the terms of the plan.
Each rollover option is immediately exercisable as of the date of grant and
has an exercise price equal to the base value of the stock appreciation rights
or the exercise price of the stock options, as applicable, from which the
options were converted. All other options granted under the plan are generally
subject to a five-year vesting schedule pursuant to which the options vest in
equal annual installments on the third, fourth and fifth anniversaries of the
grant date. In addition, all options other than rollover options must have a
per share exercise price equal to or greater than the fair market value of a
share of Digitas' common stock as of the grant date, as determined by the
board of directors or a committee of such board. All options granted under the
plan terminate
48
<PAGE>
on the tenth anniversary of the grant date. Vested options may be exercised
for specified periods after the termination of the optionee's employment or
other service relationship with us or our affiliates.
Under the plan, the exercise price of vested options may be delivered to us
by certified or bank check, wire transfer or other instrument as the board of
directors or a committee of such board may accept. In addition, under the
terms of the plan, the committee may in its discretion approve payment by
delivery of unrestricted shares of common stock or by delivery of an exercise
notice, along with a copy of irrevocable instructions to a broker selling the
underlying shares of the optionee.
In the event greater than 50% of the equity interest in Digitas is
acquired, measured by vote or value, solely for cash consideration by a non-
affiliate, all options under the plan will become fully vested and exercisable
immediately prior to the closing of the transaction.
1999 Option Plan
In September 1999, our board of directors adopted our 1999 option plan
which allows for the grant of up to 13,592,700 shares of common stock. The
plan allows us to:
. grant incentive stock options; and
. grant non-qualified stock options.
To date, all options granted under the plan have been non-qualified stock
options. As of December 31, 1999, options to purchase 3,848,000 shares of
common stock were outstanding under the plan and 9,744,700 shares were
available for future grant under the plan.
Grants under the plan may be made to employees and non-employee directors,
consultants and independent contractors who contribute to the management,
growth and profitability of the business of Digitas or its affiliates.
A committee of the board of directors or, if no such committee is formed,
the board of directors, administers the plan which includes determining the
participants in the plan and the number of shares of common stock to be
covered by each option, amending the terms of any option, subject to
limitations, and interpreting the terms of the plan. The administrator of the
plan may authorize our chief executive officer to grant options under the plan
at fair market value to individuals who are not subject to the reporting and
other provisions of Section 16 of the Exchange Act or "covered employees"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986. In
December 1999, our compensation committee granted this authority to Mr. Kenny.
The exercise price of all other options granted under the plan is
determined by the board of directors or a committee of the board. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code of 1986 may not be granted at an exercise price less than the fair market
value of the common stock on the date of grant, or less than 110% of the fair
market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power.
Non-qualified stock options granted under the plan may be granted at prices
which are less than the fair market value of the underlying shares on the date
granted. Under the plan, incentive stock options and non-qualified stock
options are generally subject to a four-year vesting schedule pursuant to
which the options vest 25% on the first anniversary of the grant date and an
additional 6.25% on each consecutive three-month period thereafter. The
options generally terminate on the tenth anniversary of the grant date. In
addition, vested options may be exercised for specified periods after the
termination of the optionee's employment or other service relationship with us
or our affiliates.
Under the plan, the exercise price for vested options may be delivered to
us by certified or bank check, wire transfer or other instrument as the board
of directors or a committee of such board may accept. In addition, under the
terms of the plan, the committee may in its discretion approve payment by
delivery of unrestricted shares
49
<PAGE>
of common stock or by delivery of an exercise notice, along with a copy of
irrevocable instructions to a broker selling the underlying shares of the
optionee.
In the event greater than 50% of the equity interest in Digitas is
acquired, measured by vote or value, solely for cash consideration by a non-
affiliate, all options under the plan will become fully vested and exercisable
immediately prior to the closing of the transaction.
2000 Stock Option and Incentive Plan
Our board of directors and shareholders have adopted the 2000 stock option
and incentive plan, which allows for the issuance of up to 7,718,200 shares of
common stock. The plan permits us to:
. grant incentive stock options;
. grant non-qualified stock options;
. grant stock appreciation rights;
. issue or sell common stock with vesting or other restrictions, or
without restrictions;
. grant rights to receive common stock in the future with or without
vesting;
. grant common stock upon the attainment of specified performance goals;
and
. grant dividend rights in respect of common stock.
These grants may be made to officers, employees, directors, consultants,
advisors and other key persons of Digitas or our affiliates.
Our compensation committee has the right, in its discretion, to select the
individuals eligible to receive awards, determine the terms and conditions of
the awards granted, accelerate the vesting schedule of any award and generally
administer and interpret the plan. The compensation committee may authorize
our chief executive officer to grant options under the plan at fair market
value to individuals who are not subject to the reporting and other provisions
of Section 16 of the Exchange Act or "covered employees" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986.
The exercise price of options granted under the plan is determined by the
compensation committee with respect to individuals subject to Section 16
reporting requirements and the chief executive officer with respect to all
other options granted. Under present law, incentive stock options and options
intended to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986 may not be granted at an exercise price less
than the fair market value of the common stock on the date of grant, or less
than 110% of the fair market value in the case of incentive stock options
granted to optionees holding more than 10% of the voting power.
The exercise price may also be delivered to us by the optionee in the form
of a promissory note if the loan of funds to the optionee has been authorized
by the compensation committee and the optionee pays so much of the exercise
price as represents the par value of the common stock acquired in a form other
than a promissory note and by a broker under irrevocable instructions to the
broker selling the underlying shares from the optionee.
Non-qualified stock options may be granted at prices which are less than
the fair market value of the underlying shares on the date granted. Options
are typically subject to a four-year vesting schedule pursuant to which the
options vest 25% on the first anniversary of the grant date and an additional
6.25% on each consecutive three-month period thereafter. The options generally
terminate ten years from the date of grant and may be exercised for specified
periods after the termination of the optionee's employment or other service
relationship with us. Upon the exercise of options, the option exercise price
must be paid in full either in cash or by certified or bank check or other
instrument acceptable to the compensation committee or, in the sole discretion
of the committee, by delivery of shares of common stock that have been owned
by the optionee free of restrictions for at least six months.
50
<PAGE>
The plan and all awards issued under the plan terminate upon any merger,
reorganization or consolidation, sale of all or substantially all of our
assets or all of our outstanding capital stock or liquidation or other similar
transaction, unless Digitas and the other parties to such transactions have
agreed otherwise. All participants under the plan will be permitted to
exercise, for a period of 30 days before any such termination, all awards held
by them which are then exercisable or become exercisable upon the closing of
the transaction.
2000 Employee Stock Purchase Plan
We have adopted an employee stock purchase plan under which employees will
be eligible to purchase shares of our common stock at a discount through
periodic payroll deductions. The 2000 Employee Stock Purchase Plan is intended
to meet the requirements of Section 423 of the Internal Revenue Code.
Purchases will occur at the end of each quarter of the offering period at a
purchase price equal to 85% of the market value of our common stock at either
the beginning of the offering period or the quarterly purchase date, whichever
is lower. The first offering period under the plan will begin on the date of
the initial public offering and will end on June 30, 2001. Subsequent 12-
month offering periods will begin on the first business day of each quarter
after June 30, 2000. Employees may participate in no more than one offering at
a time. Participants may elect to have from 1% to 10% of their pay withheld
for purchase of common stock at the end of the offering period, up to a
maximum of $25,000 within any offering period. We have reserved 2,200,000
shares of common stock for issuance under this plan.
Deferred Compensation Plan
We have adopted a deferred compensation plan to assist us in retaining and
attracting executive employees by providing them with tax deferred savings
opportunities. Under the deferred compensation plan, a select group of
management and highly compensated employees, including the named executive
officers, may defer up to 100% of their base salary, incentive compensation
and option gains.
Employment Agreements
We have employment agreements with each of Messrs. Kenny, Galford, Goss,
Smith, Ward and Ms. Biro. Each employment agreement entitles the executive to
an annual base salary and an annual bonus. Under those agreements, Mr. Kenny
is entitled to an annual base salary of $500,000; Ms. Biro, an annual base
salary of $400,000; Messrs. Galford, Goss and Ward, an annual salary of
$350,000; and Mr. Smith an annual base salary of $200,000. Each executive's
base salary is subject to annual review for possible raises. Since entering
into their employment agreements, the compensation committee has increased Mr.
Ward's annual base salary to $400,000, Ms. Biro's annual base salary to
$450,000 and Mr. Smith's to $300,000. Ms. Biro's employment agreement also
entitles her to an aggregate of $872,333 in deferred compensation. Of this
amount, $658,000 was paid in 1999 and the remaining $214,333 will be paid by
May 30, 2000, if Ms. Biro is still employed by us at that time.
Each employment agreement has a two year term which automatically extends
for additional one year terms unless we or the named executive elect not to
renew the agreement. Each employment agreement can be terminated during its
term by us or by the executive. The executive is entitled to receive severance
benefits, including one year of salary and bonus, as well as group health
benefits if we terminate the employment agreement without cause or the
executive terminates the employment agreement because we breached the
employment agreement. In addition to the severence benefits listed above, in
the event that the executive's employment is terminated within two years
following a change of control, either by us without cause or by the executive
due to an adverse change in our place of business or the executive's
responsibilities or compensation, then the executive will receive a lump sum
payment of his or her base salary plus a bonus and all unvested options held
by the executive will also become vested. Regardless of a change of control,
Mr. Kenny's severance benefits include two years of salary and group health
benefits.
51
<PAGE>
If, however, the employment agreement is terminated because of the
executive's death or for any reason other than by us without cause, then the
executive receives only:
. his or her base salary for 90 days following termination of employment;
. any unpaid annual bonus for a fiscal year that has already ended;
. benefits under long-term disability insurance coverage if termination is
due to disability; and
. vested benefits, if any.
Each employment agreement is further subject to non-competition, non-
solicitation and confidentiality provisions and customary provisions with
respect to benefits, reimbursement of expenses and non-exclusivity of rights.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1999, each of Messrs. Healy, Kern, Kenny
and Ms. Gadiesh served as members of the compensation committee of our board
of directors. Mr. Kenny has served as our chief executive officer since
September 1997. None of these individuals serves as an executive officer of
any entity that has one or more of its executive officers serving as a member
of our board of directors or compensation committee.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Recapitalization
In connection with the recapitalization, Positano Partners Ltd., a Bermuda
exempt company owned by Hellman & Friedman Capital Partners III, L.P., H&F
Orchard Partners III, L.P. and H&F International Partners III, L.P., purchased
shares of Bronner Slosberg Humphrey Co. and Strategic Interactive Group Co.
from the existing stockholders of those entities and we repurchased shares of
Bronner Slosberg Humphrey Co. from Mr. Bronner and the Michael E. Bronner 1998
Annuity Trust, dated July 16, 1998, of which Mr. Bronner and his wife are
collectively the trustee. The aggregate purchase price for these shares was
approximately $127,450,000, of which approximately $122,975,000 was paid to
Mr. Bronner and the Michael E. Bronner 1998 Annuity Trust, approximately
$830,850 was paid to Ms. Biro and approximately $3,644,150 was paid to other
shareholders of Bronner Slosberg Humphrey Co. and Strategic Interactive Group
Co. who are not executive officers or directors of Digitas. Messrs. Bunce,
Hammarskjold and Healy, each members of our board of directors, are each
Managing Directors of Hellman & Friedman LLC, an affiliate of Hellman &
Friedman Capital Partners III, L.P., H&F Orchard Partners III, L.P. and H&F
International Partners III, L.P.
We also granted to Positano a warrant to purchase an aggregate of 900,000
shares of our common stock in connection with the recapitalization. The
warrant is fully exercisable for $2.5184 per share. Pursuant to the terms of
the recapitalization agreement, the shares subject to the warrant are subject
to upward or downward adjustment.
Also as part of the recapitalization, Positano, Messrs. Bronner and Kenny
and the Bronner Slosberg Humphrey Co. trustee entered into a governance
agreement. Under the governance agreement, Positano is granted an approval
right over a number of specified fundamental corporate transactions as well as
the right to nominate and have elected two members of our board of directors.
The governance agreement also entitles Mr. Bronner and our chief executive
officer to be members of our board of directors. The governance agreement will
terminate upon consummation of this offering. Following the offering, Hellman
& Friedman Capital Partners III, L.P., H&F Orchard Partners III, L.P. and H&F
International Partners III, L.P., collectively, will have the right to elect
at least one director so long as they own at least 5% of our outstanding
common stock.
We also entered into a shareholders agreement in connection with the
recapitalization. The shareholders agreement among other things entitles
Positano and Mr. Bronner to purchase at a discount shares of our common stock
held by former employees who are parties to the agreement to the extent we do
not elect to repurchase those shares. To date, neither Positano nor Mr.
Bronner has exercised these repurchase rights. The shareholders agreement also
entitles the shareholders and option holders who are parties to the agreement,
including Mr. Bronner, Positano and each of the executive officers other than
Messrs. Smith, Galford and Goss to participate in certain sales of common
stock by either Positano or Mr. Bronner. Sales of common stock in connection
with this offering are excluded. Prior to this offering neither Positano nor
Mr. Bronner have sold any shares of our common stock in a transaction that
would entitle the other parties to the shareholders agreement to participate.
Upon consummation of this offering, the shareholders agreement will terminate.
Positano, Mr. Bronner and members of our senior management, including each
of our executive officers other than Messrs. Smith, Galford and Goss entered
into an escrow agreement in connection with the recapitalization. In the event
we breached our representations or warranties under the recapitalization
agreement, the escrow agreement entitles Positano to receive up to an
aggregate of approximately $18 million in cash, shares and options received by
certain members of our senior management in connection with the
recapitalization. The escrow agreement also entitles Messrs. Bronner and Kenny
to direct the voting of all shares of common stock held in escrow. The escrow
agreement will terminate immediately prior to the consummation of this
offering.
Under the registration rights agreement we entered into in connection with
the recapitalization, Positano and Mr. Bronner have demand registration rights
with respect to the common stock they hold. Positano, Mr. Bronner and the
other shareholders and option holders who are parties to the registration
rights agreement, including each of our executive officers other than Messrs.
Smith, Galford and Goss also have piggyback registration rights under the
registration rights agreement. See "Shares Eligible for Future Sale."
53
<PAGE>
Mr. Bronner entered into a noncompetition, nonsolicitation and
confidentiality agreement with us in connection with the recapitalization. In
accordance with the terms of the agreement, Mr. Bronner is entitled to a
salary of $500,000 per year while he is serving as chairman of the limited
liability company through which our business is operated. On December 2, 1999,
Mr. Bronner resigned as chairman of that company and was named Chairman
Emeritus of Digitas.
Other Transactions
In January 1999, we issued to Positano two fully exercisable options, each
to purchase 90,000 shares of common stock at an exercise price per share equal
to $1.1775, and an aggregate exercise price of $211,950, in exchange for an
aggregate payment of $241,350.
Also in 1999, we sold an aggregate of 399,272 shares of our common stock to
one director and one trust of which a director is the trustee. The shares were
sold for $2.5184 per share or an aggregate of $1,005,526, which price the
board of directors deemed to be the fair market value per share at the time of
sale. The following table sets forth the number of shares sold to the director
and/or trust and the date upon which the shares were sold:
<TABLE>
<CAPTION>
Name Date of Sale Shares of Common Stock
---- --------------- ----------------------
<S> <C> <C>
The Arthur Kern Revocable Trust...... August 2, 1999 99,272
Orit Gadiesh......................... August 26, 1999 300,000
</TABLE>
Mr. Bronner is the chairman and founder of Lifetime Rewards.com, a former
client. During the last year, we provided approximately $85,000 in services to
Lifetime Rewards.com. We believe that the terms of our relationship with
Lifetime Rewards.com were no less favorable to us than they would have been
had they been obtained from unaffiliated third parties.
In January 2000, we purchased options to purchase 300,000 shares of our
common stock held by Mr. Kenny for a per share purchase price of $8.75 and an
aggregate purchase price of $2,625,000, less $303,255, the aggregate exercise
price of such options. Also in January 2000, we purchased options to purchase
180,000 shares of our common stock held by Positano for a per share purchase
price of $8.75 and an aggregate purchase price of $1,575,000, less $211,950,
the aggregate exercise price of such options. We also purchased in January
2000 warrants to purchase 120,000 shares of our common stock held by Positano
for a per share purchase price of $8.75 and an aggregate purchase price of
$1,050,000, less $302,202, the aggregate exercise price of such warrants. We
paid for such purchases by delivering a promissory note which will be repaid
with the proceeds from this offering.
We believe that each of the transactions described above was entered into
on terms no less favorable to Digitas than could be obtained with
nonaffiliated parties. We have adopted a policy providing that all material
transactions between us and our officers, directors and affiliates must be
approved by a majority of the members of our board of directors and by a
majority of the disinterested members of our board of directors and be on
terms no less favorable to us than could be obtained from unaffiliated
parties.
54
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of Digitas common stock as adjusted to reflect the sale of the
common stock offered hereby, by:
. all persons known by us to own beneficially 5% or more of the common
stock;
. each of our directors;
. the chief executive officer and the other named executive officers;
. each of the selling shareholders; and
. all directors and executive officers as a group.
Unless otherwise indicated, each of the shareholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by the shareholder.
The number of shares beneficially owned by each shareholder is determined
under rules issued by the Securities and Exchange Commission and includes
voting or investment power with respect to securities. Under these rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and includes any shares as
to which the individual or entity has the right to acquire beneficial
ownership within 60 days after January 31, 1999 through the exercise of any
warrant, stock option or other right. The inclusion in this prospectus of such
shares, however, does not constitute an admission that the named shareholder
is a direct or indirect beneficial owner of such shares. The applicable
percentage of "beneficial ownership" after the offering is based upon
56,903,479 shares of common stock outstanding as of January 31, 1999. The
address for Hellman & Friedman Capital Partners III, L.P., H&F Orchard
Partners III, L.P. and H&F International Partners III, L.P. is c/o Hellman &
Friedman LLC, One Maritime Plaza, San Francisco, California 94111. The address
for Squam Lake Investors, III L.P. and Sunapee Securities, Inc. is Two Copley
Place, Boston, Massachusetts 02116. The address for each of our directors and
named executive officers is c/o Digitas Inc., The Prudential Tower, 800
Boylston Street, Boston, Massachusetts 02199.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)(2)
--------------------------------------------------
Prior to Offering After the Offering
------------------ ------------------
Shares to be
Sold in
Name of Beneficial Owner Number Percent Offering Number Percent
- ------------------------ ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
5% Shareholders
Hellman & Friedman Capital
Partners III, L.P. (2).... 36,899,157 71.77% 2,801,850 34,097,307 59.18%
H&F Orchard Partners III,
L.P. (3).................. 2,716,800 5.35 206,294 2,510,506 4.41
Other Selling Shareholders
H&F International Partners
III, L.P. (4)............. 812,614 1.60 61,704 750,910 1.32
Squam Lake Investors, III
L.P....................... 317,700 * 24,124 293,576 *
Sunapee Securities, Inc.... 79,380 * 6,028 73,352 *
Directors and Named
Executive Officers
Michael E. Bronner (5)..... 7,109,521 14.02 -- 7,109,521 12.49
David W. Kenny (6)......... 6,300,000 11.05 -- 6,300,000 9.97
Kathleen L. Biro (7)....... 1,814,747 3.49 -- 1,814,747 3.12
Michael Ward (8)........... 600,000 1.17 -- 600,000 1.04
Orit Gadiesh............... 300,000 * -- 300,000 *
Arthur Kern (9)............ 297,815 * -- 297,815 *
Meryl Beckingham........... 0 * -- 0 *
John L. Bunce, Jr. (10).... 0 * -- 0 *
Philip U. Hammarskjold
(10)...................... 0 * -- 0 *
Patrick J. Healy (10)...... 0 * -- 0 *
All executive officers and
directors, as a group
(11 persons).............. 16,422,083 27.88 -- 16,422,083 25.22
</TABLE>
55
<PAGE>
- --------
* Represents less than 1% of the outstanding shares of common stock
(1) Assumes the underwriters do not elect to exercise the over-allotment
option to purchase an additional 930,000 shares of common stock from us
and 465,000 shares of common stock from the selling shareholders.
(2) Includes 36,187,251 shares and warrants immediately exercisable at an
exercise price of $2.5184 per share for 711,906 shares.
(3) Includes 2,664,384 shares and warrants immediately exercisable at an
exercise price of $2.5184 per share for 52,416 shares.
(4) Includes 796,936 shares and warrants immediately exercisable at an
exercise price of $2.5184 per share for 15,678 shares.
(5) Includes 4,257,318 shares held by Michael Bronner and 2,852,203 shares
owned by the Michael E. Bronner 1998 Annuity Trust pursuant to which
Michael Bronner has sole dispositive power over the shares until July 16,
2000. Michael Bronner and Lisa Bronner are collectively the trustee of
the Michael E. Bronner 1998 Annuity Trust and have sole voting power with
respect to the shares.
(6) Includes options held by David W. Kenny which are immediately exercisable
at an exercise price of $1.01085 per option for 5,700,000 shares and
options immediately exercisable at an exercise price of $2.5184 per
option for 600,000 shares.
(7) Includes 515,662 shares held by Kathleen L. Biro and options immediately
exercisable at an exercise price of $1.6499 per option for 1,299,085
shares.
(8) Includes options held by Michael Ward which are immediately exercisable
at an exercise price of $1.1775 per option for 150,000 shares and options
immediately exercisable at an exercise price of $0.9419 per option for
450,000 shares.
(9) Includes 297,815 shares held by the Arthur Kern Revocable Trust of which
Arthur Kern has sole dispositive and voting power.
(10) Messrs. Bunce, Hammarskjold and Healy are affiliated with Hellman &
Friedman Capital Partners III, L.P., H&F Orchard Partners III, L.P. and
H&F International Partners III, L.P. H&F Investors III is the sole
general partner for each of Hellman & Friedman Capital Partners III,
L.P., H&F Orchard Partners III, L.P. and H&F International Partners III,
L.P. The managing general partner of H&F Investors III is Hellman &
Friedman Associates III, L.P., which in turn has H&F Management III, LLC
and H&F Investors III, Inc. as its general partners. The sole owner of
H&F Investors III, Inc. is The Hellman Family Revocable Trust. Messrs.
Bunce, Hammarskjold and Healy are members of H&F Management III, LLC.
The investment decisions of H&F Management III, LLC and H&F Investors
III, Inc. are made by an eight person executive committee of which
Messrs. Bunce and Hammarskjold are members. While Hellman & Friedman
Capital Partners III, L.P., H&F Orchard Partners III, L.P. and H&F
International Partners III, L.P., H&F Investors III, Inc., Hellman &
Friedman Associates III, L.P., H&F Management III, LLC, The Hellman
Family Revocable Trust and Messrs. Bunce, Hammarskjold and Healy could
each be deemed to beneficially own the shares held by Hellman & Friedman
Capital Partners III, L.P., H&F Orchard Partners III, L.P. and H&F
International Partners III, L.P., each of them disclaims beneficial
ownership except to the extent of its or his indirect pecuniary
interest.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
As of December 31, 1999, there were 50,703,479 shares of common stock
issued and outstanding and stock options to purchase 28,308,972 shares of
common stock, 15,598,972 of which were then exercisable, and outstanding
warrants to purchase 900,000 shares, all of which were then exercisable. At
December 31, 1999, there were fourteen holders of record of our common stock.
Following the offering, our authorized capital stock will consist of
175,000,000 shares of common stock, par value $.01 per share, of which
56,903,479 will be issued and outstanding, and 25,000,000 shares of
undesignated preferred stock, par value $.01 per share, issuable in one or
more series designated by our board of directors, of which no shares will be
issued and outstanding.
Common Stock
Voting Rights
The holders of our common stock have one vote per share. Holders of our
common stock are not entitled to vote cumulatively for the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority, or, in the case of election of directors, by a
plurality, of the votes cast at a meeting at which a quorum is present, voting
together as a single class, subject to any voting rights granted to holders of
any then outstanding preferred stock.
Dividends
Holders of common stock will share ratably in any dividends declared by our
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid
to holders of shares of common stock.
Other Rights
On liquidation, dissolution or winding up of Digitas, all holders of common
stock are entitled to share ratably in any assets available for distribution
to holders of shares of common stock. No shares of common stock are subject to
redemption or have preemptive rights to purchase additional shares of common
stock.
Preferred Stock
Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series. Our board of directors
is authorized to fix the voting rights, if any, designations, powers,
preferences, qualifications, limitations and restrictions applicable to the
shares of each series. Our board of directors may, without stockholder
approval, issue preferred stock with voting and other rights that could
adversely affect the voting power and other rights of the holders of the
common stock and could have anti-takeover effects, including preferred stock
or rights to acquire preferred stock in connection with implementing a
shareholder rights plan. We have no present plans to issue any shares of
preferred stock. The ability of our board of directors to issue preferred
stock without stockholder approval could have the effect of delaying,
deferring or preventing a change of control of Digitas or the removal of
existing management.
Indemnification Matters
We have entered into indemnification agreements with each of our directors.
The form of indemnity agreement provides that we will indemnify our directors
or executive officers for expenses incurred because of their status as a
director or executive officer, to the fullest extent permitted by Delaware
law, our certificate of incorporation and our bylaws.
57
<PAGE>
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director
has breached his or her duty of loyalty, failed to act in good faith, engaged
in intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation
Law or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers
shall be, and in the discretion of our board of directors, non-officer
employees may be, indemnified by Digitas to the fullest extent authorized by
Delaware law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of Digitas. The by-laws also provide for the advancement of expenses
to directors and, in the discretion of our board of directors, officers and
non-officer employees. In addition, our by-laws provide that the right of
directors and officers to indemnification shall be a contract right and shall
not be exclusive of any other right now possessed or hereafter acquired under
any by-law, agreement, vote of stockholders or otherwise. We also have
directors' and officers' insurance against various liabilities.
To the extent indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
Digitas as described above, we have been advised that in the opinion of the
Securities and Exchange Commission indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. At present,
there is no pending material litigation or proceeding involving any director,
officer, employee or agent of Digitas in which indemnification will be
required or permitted.
Provisions of our Certificate of Incorporation and By-laws that may have Anti-
takeover Effect
A number of provisions of our certificate of incorporation and by-laws
which will be effective upon completion of this offering concern matters of
corporate governance and the rights of stockholders. These provisions, as well
as the ability of our board of directors to issue shares of preferred stock
and to set the voting rights, preferences and other terms, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by our board of directors, including takeovers which stockholders may
deem to be in their best interests. These provisions, together with our
classified board of directors, also could delay or frustrate the removal of
incumbent directors even if the removal of incumbent directors would be
beneficial to our stockholders. Our board of directors believes that these
provisions are appropriate to protect the interests of Digitas and of our
stockholders. Our board of directors has no present plans to adopt any further
measures or devices which may be deemed to have an "anti-takeover effect."
Classified Board of Directors
Our board of directors is divided into three classes serving staggered
three-year terms, with one class being elected each year. Our classified
board, together with other provisions of our certificate of incorporation
authorizing the board of directors to fill vacant directorships or increase
the size of the board, may prevent a stockholder from removing, or delay the
removal of, incumbent directors and simultaneously gaining control of the
board of directors by filling vacancies created by such removal with its own
nominees.
No Stockholder Action by Written Consent
Our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders.
Special Meetings of Stockholders
Our certificate of incorporation and by-laws provide that a special meeting
of stockholders may be called only by our board of directors unless otherwise
required by law. Our by-laws provide that only those matters included in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law.
58
<PAGE>
Advance Notice of Director Nominations and Stockholder Proposals
Our by-laws include advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders. For the first annual
meeting following the completion of this offering, a stockholder's notice of a
director nomination or proposal will be timely if delivered to the secretary
of Digitas at our principal executive offices not later than the close of
business on the later of the 75th day prior to the scheduled date of the
annual meeting or the 10th day following the day on which public announcement
of the date of the annual meeting is made by Digitas.
Director Vacancies and Removal
Our certificate of incorporation provides that vacancies in our board of
directors may be filled only by the affirmative vote of a majority of the
remaining directors. Our certificate of incorporation provides that directors
may be removed from office only with cause and only by the affirmative vote of
holders of at least seventy-five percent of the shares then entitled to vote
at an election of directors.
Amendment of the Certificate of Incorporation
Any amendment to our certificate of incorporation must first be approved by
a majority of our board of directors and, if required by law, thereafter
approved by a majority of the outstanding shares entitled to vote with respect
to such amendment, except that any amendment to the provisions relating to
stockholder action, directors, limitation of liability and the amendment of
our certificate of incorporation must be approved by not less than 75% of the
outstanding shares entitled to vote with respect to such amendment.
Amendment of By-laws
Our certificate of incorporation and by-laws provide that our by-laws may
be amended or repealed by our board of directors or by the stockholders.
Action by the board of directors requires the affirmative vote of a majority
of the directors then in office. Action by the stockholders requires the
affirmative vote of at least seventy-five percent of the shares present in
person or represented by proxy at an annual meeting of stockholders or a
special meeting called for such purpose unless our board of directors
recommends that the stockholders approve the amendment or repeal at such
meeting, in which case the amendment or repeal shall only require the
affirmative vote of a majority of the shares present in person or represented
by proxy at the meeting.
Statutory Business Combination Provision
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under special
circumstances, with an "interested stockholder" for a period of three years
after the date the person became an "interested stockholder" unless:
. before the person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
. upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
. following the transaction in which the person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66% of the outstanding voting
stock of the corporation not owned by the interested stockholder. The
term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior
three years, owned, 15% or more of a corporation's outstanding voting
stock.
59
<PAGE>
The term "business combination" includes mergers, consolidations, asset
sales involving 10% or more of a corporation's assets and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved
by holders of a least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contain any exclusion.
Trading on the Nasdaq National Market System
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "DTAS."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be American
Stock Transfer & Trust Company.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and no prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market
price of our common stock prevailing from time to time. Nonetheless,
substantial sales of common stock in the public market following this
offering, or the perception that sales could occur, could lower the market
price of our common stock or make it difficult for us to raise additional
equity capital in the future.
Following this offering, there will be 56,903,479 shares of our common
stock outstanding. Of these shares, the 9,300,000 shares that are being sold
in this offering generally will be freely transferable without restriction or
further registration under the Securities Act, except that any shares held by
our "affiliates" as defined in Rule 144 under the Securities Act may be sold
only in compliance with the limitations described below.
Sales of Restricted Securities
The remaining 47,603,479 shares of common stock that will be outstanding
after the offering will be "restricted securities" as defined in Rule 144, and
may be sold in the future without registration under the Securities Act
subject to compliance with the provisions of Rule 144 or any other applicable
exemption under the Securities Act.
In general, under Rule 144 a shareholder who has beneficially owned his or
her restricted securities for at least one year, including the holding period
of any prior owner, except an affiliate from whom those shares were purchased,
is entitled to sell, within any three-month period commencing 90 days after
the date of this prospectus, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of our common stock,
approximately 569,035 shares immediately after this offering, or the average
weekly trading volume in our common stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided requirements concerning availability of public information, manner of
sale and notice of sale are satisfied. In addition, a shareholder that is not
one of our affiliates at any time during the three months preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner, except an affiliate
from whom those shares were purchased, is entitled to sell the shares
immediately under Rule 144(k) without compliance with the above described
requirements under Rule 144.
Securities issued in reliance on Rule 701, such as shares of our common
stock acquired pursuant to the exercise of certain options granted under our
stock plans, are also restricted securities and, beginning 90 days after the
date of this prospectus, may be sold by shareholders other than our affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year holding period
requirement.
Stock Options
We intend to file registration statements on Form S-8 with respect to the
aggregate of 40,763,672 shares of common stock issuable under our stock option
and incentive plans and our employee stock purchase plan promptly following
the consummation of this offering. Shares issued upon the exercise of stock
options after the effective date of the Form S-8 registration statement will
be eligible for resale in the public market without restriction, except that
affiliates must comply with Rule 144.
Lock-up Agreements
Shareholders and vested option holders, including but not limited to all
executive officers and directors, holding an aggregate of approximately
60,173,709 shares and vested options to purchase shares, have agreed, subject
to limited exceptions, not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or
61
<PAGE>
dispose of, directly or indirectly, or enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of, any shares of common stock or any
securities convertible into or exercisable or exchangeable for shares of
common stock for a period of 180 days after the date of this prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated.
Registration Rights
In connection with the January 1999 recapitalization, we entered into a
registration rights agreement with Positano, Mr. Bronner and each of our other
shareholders and option holders as of the date of the recapitalization. Each
individual who has been granted options under the 1998 option plan since the
recapitalization has also become a party to the registration rights agreement.
Under the registration rights agreement, we have granted:
. Positano the right to require us, subject to the terms and conditions
set forth in the registration rights agreement, to register shares of
common stock held by it for sale in accordance with their intended
method of disposition of those shares; and
. Mr. Bronner the right to require us, subject to the terms and conditions
set forth in the registration rights agreement, to register the number
of shares of common stock held by him and the Michael E. Bronner 1998
Annuity Trust for sale in accordance with their intended method of
disposition of those shares.
Positano may request up to three demand registrations and Mr. Bronner may
request one demand registration, each as described above. Mr. Bronner may only
demand the registration of his securities if we have already consummated an
initial public offering and the aggregate market value of the shares of common
stock proposed to be registered by him is greater than or equal to $15
million. In addition, Positano may request that we defer any demand
registration requested by Mr. Bronner for up to 180 days after the date of
such request. Positano has the right to select the underwriters in connection
with any demand registration in which it is participating other than a Mr.
Bronner demand registration in which Mr. Bronner is offering a greater number
of shares of common stock.
Subject to limitations set forth in the registration rights agreement, the
other parties to the registration rights agreement have the right to
participate in any demand registration requested by Positano or Mr. Bronner.
In addition, we have granted Positano, Mr. Bronner and the other parties to
the registration rights agreement, the right, subject to exceptions set forth
in the registration rights agreement, to participate in registrations of
common stock initiated by us on our own behalf or on behalf of any other
stockholder.
The registration rights agreement provides that if requested by the
managing underwriter(s) of any underwritten offering of shares of common
stock, Positano, Mr. Bronner and the other parties to the registration rights
agreement will agree, not to effect any public sale or distribution of any
shares of common stock for a period of up to 180 days following and seven days
prior to the effective date of demand or piggyback registration. See
"Underwriters."
Under the registration rights agreement, we are required to pay expenses
incurred by us and the fees and expenses of one counsel to the selling
shareholders in connection with any demand and piggyback registrations. We
also have agreed to indemnify the holders of registration rights under the
registration rights agreement against specific liabilities, including
liabilities under the Securities Act, and to contribute to payments they may
be required to make. The registration rights agreement will terminate on the
earlier of the date upon which the parties to the registration rights
agreement no longer hold any shares of common stock that must be registered in
order to be sold or the date upon which the parties agree that the agreement
should be terminated. After the consummation of this offering, the
registration rights agreement will terminate as to any party other than
Positano and Mr. Bronner at the time a party owns fewer than one percent of
our outstanding common stock.
62
<PAGE>
Effect of Sale of Shares
Prior to this offering, there has been no public market for our common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares for sale will
have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of our common stock in
the public market could adversely affect the market price of the common stock
and could impair our future ability to raise capital through an offering of
our equity securities.
63
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Deutsche Bank Securities Inc., Salomon Smith Barney Inc., Banc
of America Securities LLC and Bear, Stearns & Co. Inc. are acting as
representatives, each agreed to purchase, and we and the selling shareholders
agreed to sell to them, the number of shares of common stock set forth
opposite the names of the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated................................ 3,791,250
Deutsche Bank Securities Inc..................................... 1,390,125
Salomon Smith Barney Inc......................................... 1,390,125
Banc of America Securities LLC................................... 926,750
Bear, Stearns & Co. Inc.......................................... 926,750
Adams, Harkness & Hill, Inc. .................................... 125,000
Robert W. Baird & Co. Incorporated............................... 125,000
First Union Securities, Inc. .................................... 125,000
FleetBoston Robertson Stephens Inc. ............................. 125,000
ING Barings LLC.................................................. 125,000
Prudential Securities Corporation................................ 125,000
SG Cowen Securities Corporation.................................. 125,000
---------
Total.......................................................... 9,300,000
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and the selling stockholders and subject to
prior sale. The underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of the shares of common stock
offered in this offering are subject to the approval of various legal matters
by their counsel and to other delineated conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered in
this offering, other than those covered by the over-allotment option described
below, if any shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page and part to dealers at a price that represents a concession not
in excess of $1.09 a share under the initial public offering price. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
Digitas and the selling shareholders have granted to the underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase
up to an aggregate of 930,000 and 465,000 additional shares of common stock,
at the initial public offering price set forth on the cover page of this
prospectus, less underwriting discounts and commissions. The underwriters may
exercise an option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of common stock offered in
this offering. To the extent the option is exercised, each underwriter must,
subject to specified conditions, purchase a number of additional shares
approximately proportionate to that underwriter's initial purchase commitment.
If the underwriters' over-allotment option is exercised in full, the total
price to public would be $256,680,000, the total underwriters' discounts and
commissions would be $17,967,600, and the total proceeds to us would be
$159,141,600.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares of common stock offered in this
offering for our directors, officers, employees and related persons. The
number of shares of common stock available for sale to the general public will
be reduced to the extent our directors, officers, employees and related
persons purchase reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the
same basis as the other shares offered.
64
<PAGE>
Digitas, our directors, officers and our shareholders have each agreed,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the underwriters, during the period ending 180 days after the date
of this prospectus, not to, directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock,
whether the shares or any other securities are then owned by the person
or are thereafter acquired directly from us; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock,
whether any transaction described above is to be settled by delivery of common
stock or other securities, in cash or otherwise. This lock-up restriction is
subject, in limited circumstances for shares held by shareholders other than
officers and directors of Digitas, to earlier release. See "Shares Eligible
for Future Sale."
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "DTAS."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
the previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
A prospectus in electronic format will be made available on the Web sites
maintained by one or more of the underwriters. The representatives may agree
to allocate a number of shares to underwriters for sale to their on line
brokerage account holders. The representatives will allocate shares to the
underwriters that may make Internet distributions on the same basis as other
allocations. Charles Schwab & Co., Incorporated will be participating in the
offering as a member of the selling group and plans to use the Internet as one
of several means of retail distribution.
We, the selling shareholders and the underwriters have agreed to indemnify
each other against specific liabilities, including liabilities under the
Securities Act.
Deutsche Bank Securities Inc., one of the representatives of the
underwriters, is affiliated with Bankers Trust Company, one of Digitas'
lenders. More than 10% of the net proceeds Digitas receives from this offering
may be used to repay indebtedness owing to Bankers Trust. As a result, the
offering must be conducted in compliance with the conflict-of-interest
requirements of NASD Regulation, Inc., the regulatory agency that governs the
compensation paid to underwriters in securities offerings. Under these rules,
the initial public offering price of the common stock can be no higher than
that recommended by a qualified independent underwriter, as that term is
defined in the NASD's rules. Morgan Stanley & Co. Incorporated has agreed to
serve as a qualified independent underwriter and has conducted due diligence
and will recommend the maximum price for the shares of common stock to be
offered.
65
<PAGE>
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares
of common stock was determined by negotiations between Digitas and the
representatives of the underwriters. Among the factors considered in
determining the initial public offering price were:
. our record of operations, our current financial position and future
prospects;
. the experience of our management;
. our revenue, earnings and other financial and operating information in
recent periods; and
. the price-earnings ratios, price-revenue ratios, market prices of
securities and other financial and operating information of companies
engaged in activities similar to ours.
VALIDITY OF COMMON STOCK
The validity of the shares of common stock we are offering will be passed
upon for us by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Legal
matters in connection with this offering will be passed upon for the
underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The combined financial statements and financial statement schedule as of
December 31, 1998 and 1997 and for each of the two years in the period ended
December 31, 1998 included in this prospectus have been included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting. The
consolidated financial statements and financial statement schedule included in
or made a part of this prospectus and registration statement, to the extent
and for the periods indicated in their reports, have been audited by Arthur
Andersen LLP as indicated in their reports with respect thereto, and are
included in reliance upon the authority of said firm as experts in giving said
reports.
On December 27, 1999, PricewaterhouseCoopers LLP resigned as our
independent accountants. The reports of PricewaterhouseCoopers LLP on the
combined financial statements for the two years ended December 31, 1998
contained no adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principle. In
connection with its audits for the two years ended December 31, 1998 and
through December 27, 1999, there have been no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference thereto in
their report on the combined financial statements for such years. We engaged
Arthur Andersen LLP as our principal accountants on January 7, 2000.
66
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common
stock we propose to sell in this offering. This prospectus, which constitutes
part of the registration statement, does not contain all of the information
set forth in the registration statement. For further information about us and
the common stock we propose to sell in this offering, we refer you to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. If a contract or document has been filed as an exhibit
to the registration statement, we refer you to the copy of the contract or
document that we have filed. You may inspect the registration statement,
including exhibits, without charge at the principal office of the Securities
and Exchange Commission in Washington, D.C. You may inspect and copy the same
at the public reference facilities maintained by the Securities and Exchange
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549, and at the Commission's regional offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and
7 World Trade Center, Suite 1300, New York, New York 10048. You can also
obtain copies of this material at prescribed rates by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, the Securities and Exchange Commission maintains a
website at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
67
<PAGE>
DIGITAS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants........................................ F-2
Balance Sheet of the Predecessor (combined) at December 31, 1998, and of
the Company at December 31, 1999 ........................................ F-4
Statement of Operations of the Predecessor (combined) for the years ended
December 31, 1997 and 1998, and of the Company for the year ended
December 31, 1999 ....................................................... F-5
Statement of Shareholders' Equity (Deficit) of the Predecessor (combined)
for the years ended December 31, 1997 and 1998, and of the Company for
the year ended December 31, 1999 ........................................ F-6
Statement of Cash Flows of the Predecessor (combined) for the years ended
December 31, 1997 and 1998, and of the Company for the year ended
December 31, 1999 ....................................................... F-7
Notes to Financial Statements ............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Digitas,
We have audited the accompanying balance sheet of Bronner Slosberg Humphrey
Co. (a Massachusetts Business Trust), also known as Digitas, as of December
31, 1999 and the related statement of operations, shareholders' equity
(deficit) and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digitas as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 31, 2000 (except with
respect to the matter discussed
in Note 7 for which the date is
February 10, 2000)
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Bronner Slosberg Humphrey Co. and
Strategic Interactive Group, Co.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the combined financial
position of Bronner Slosberg Humphrey Co. and Strategic Interactive Group, Co.
at December 31, 1998 and 1997, and the combined results of their operations
and their combined cash flows for each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 15, 1999
F-3
<PAGE>
DIGITAS
BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
Predecessor
(combined) Company
------------ ------------
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................................................................... $ 37 $ 441
Accounts receivable, net of allowance for doubtful accounts of $741 and $1,053 at December 31, 1998
and 1999, respectively............................................................................ 23,782 40,296
Accounts receivable, unbilled...................................................................... 15,150 25,521
Other current assets............................................................................... 1,505 1,999
Deferred tax assets................................................................................ 1,952 --
-------- --------
Total current assets.............................................................................. 42,426 68,257
Fixed assets, net.................................................................................... 17,975 20,237
Intangible assets, net............................................................................... -- 162,172
Other assets......................................................................................... 1,869 2,223
-------- --------
Total assets...................................................................................... $ 62,270 $252,889
======== ========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable................................................................................... $ 9,849 $ 15,352
Line of credit..................................................................................... 7,000 --
Current portion of long-term debt.................................................................. 172 7,530
Billings in excess of cost and estimated earnings on uncompleted contracts......................... 10,517 17,761
Accrued expenses................................................................................... 7,039 12,717
Accrued compensation............................................................................... 40,145 16,369
Capital lease obligations.......................................................................... 1,369 398
Notes payable, shareholders........................................................................ 12,003 --
-------- --------
Total current liabilities......................................................................... 88,094 70,127
Long-term debt, less current portion................................................................. 1,432 62,422
Capital lease obligation, long-term portion.......................................................... 317 456
Deferred tax liability............................................................................... 139 --
Other long-term liabilities.......................................................................... 48 48
-------- --------
90,030 133,053
Commitments (Note 15)
Shareholders' equity (deficit):
BSH common shares, no par value per share, 48,930,022 shares authorized, issued, and outstanding at
December 31, 1998 and 50,703,480 shares authorized, issued and outstanding at December 31, 1999... 1 --
SIG common shares, no par value per share, 387,920 shares authorized, issued, and outstanding at
December 31, 1998 and none at December 31, 1999................................................... 1 --
Additional paid-in capital......................................................................... 3,435 208,153
Interest receivable on shareholders' notes......................................................... (94) --
Accumulated deficit................................................................................ (27,921) (40,028)
Deferred Compensation.............................................................................. -- (48,289)
Less: treasury stock, at cost, 16,211,786 shares at December 31, 1998 and none at December 31,
1999.............................................................................................. (3,182) --
-------- --------
Total shareholders' equity (deficit).............................................................. (27,760) 119,836
-------- --------
Total liabilities and shareholders' equity........................................................ $ 62,270 $252,889
- --------------------------------------------------
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DIGITAS
STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor (combined) Company
---------------------- -------
Year ended December 31, Year ended December 31,
------------------------ -----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue..................... $ 101,238 $ 122,309 $ 187,007
----------- ----------- -----------
Operating expenses:
Professional services
costs.................... 57,610 65,696 102,247
Selling, general and
administrative expense... 40,552 48,485 67,048
Stock-based compensation.. 6,325 25,820 10,743
Amortization of intangible
assets................... -- -- 36,688
----------- ----------- -----------
Total operating expenses.. 104,487 140,001 216,726
----------- ----------- -----------
Loss from operations........ (3,249) (17,692) (29,719)
----------- ----------- -----------
Other income (expense):
Interest income........... 182 21 55
Interest expense.......... (2,613) (2,719) (7,336)
----------- ----------- -----------
(2,431) (2,698) (7,281)
----------- ----------- -----------
Loss before provision for
income taxes............... (5,680) (20,390) (37,000)
Benefit from (provision for)
income taxes............... 114 1,439 (567)
----------- ----------- -----------
Net loss.................... $ (5,566) $ (18,951) $ (37,567)
=========== =========== ===========
Net loss per share (Note 2)
Basic and diluted......... $ (0.74)
===========
Weighted average common
shares outstanding (Note 2)
Basic and diluted......... 50,703,479
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DIGITAS
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
Notes
Additional receivable Interest on Retained
paid-in from shareholders' Deferred earnings
Common stock capital shareholders notes Compensation (deficit) Treasury stock
------------------ ---------- ------------ ------------- ------------ --------- -------------------
Shares Amount Shares Amount
---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor
(combined)
Balance at
December 31,
1996........... 51,535,166 $ 2 $ 5,498 $ (3,304) $(205) -- $ (3,089) 6,993,261 $ (3,527)
Issuance of
common stock... 8,040
Reversal of
prior year
treasury stock
redemption,
net............ 1,339,356 (669,678) 1,247
Treasury stock
redemption..... (1,010,308) 176 505,154 (902)
Cancellation of
note receivable
in connection
with exchange
agreement...... (2,554,312) (2,063) 2,063 1,277,156
Interest income
on
shareholders'
notes.......... (161)
Net loss........ (5,566)
---------- ---- -------- -------- ----- -------- --------- --------- --------
Balance at
December 31,
1997........... 49,317,942 2 3,435 (1,065) (366) -- (8,655) 8,105,893 (3,182)
Offset of note
receivable from
shareholder
against note
payable from
another
shareholder.... 1,065 272
Distribution to
shareholders... (315)
Net loss........ (18,951)
---------- ---- -------- -------- ----- -------- --------- --------- --------
Balance at
December 31,
1998........... 49,317,942 $ 2 $ 3,435 $ -- $ (94) -- $ (27,921) 8,105,893 $ (3,182)
========== ==== ======== ======== ===== ======== ========= ========= ========
<CAPTION>
Total
shareholders'
equity
(deficit)
-------------
<S> <C>
Predecessor
(combined)
Balance at
December 31,
1996........... $ (4,625)
Issuance of
common stock...
Reversal of
prior year
treasury stock
redemption,
net............ 1,247
Treasury stock
redemption..... (726)
Cancellation of
note receivable
in connection
with exchange
agreement...... --
Interest income
on
shareholders'
notes.......... (161)
Net loss........ (5,566)
-------------
Balance at
December 31,
1997........... (9,831)
Offset of note
receivable from
shareholder
against note
payable from
another
shareholder.... 1,337
Distribution to
shareholders... (315)
Net loss........ (18,951)
-------------
Balance at
December 31,
1998........... $(27,760)
=============
Company
Company
Balance at
January 1,
1999........... -- -- -- -- -- -- -- -- --
Issuance of
common stock in
connection with
Recapitalization.. 50,086,487 152,148
Repurchase of
stock options
and warrants... (2,566)
Exercise of
stock
options ....... 118,448 151
Deferred stock-
based
compensation... 55,593 (55,593)
Distribution to
shareholders .. (2,461)
Stock-based
compensation .. 3,029 5,846
Cancellation of
stock options.. (1,458) 1,458
Issuance of
common stock .. 498,544 1,256
Net loss........ (37,567)
---------- ---- -------- -------- ----- -------- --------- --------- --------
Balance at
December 31,
1999 .......... 50,703,479 $-- $208,153 $ -- $-- $(48,289) $ (40,028) -- $ --
========== ==== ======== ======== ===== ======== ========= ========= ========
Balance at
January 1,
1999........... --
Issuance of
common stock in
connection with
Recapitalization.. 152,148
Repurchase of
stock options
and warrants... (2,566)
Exercise of
stock
options ....... 151
Deferred stock-
based
compensation...
Distribution to
shareholders .. (2,461)
Stock-based
compensation .. 8,875
Cancellation of
stock options..
Issuance of
common stock .. 1,256
Net loss........ (37,567)
-------------
Balance at
December 31,
1999 .......... $119,836
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DIGITAS
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Predecessor
(combined) Company
----------- -------
Year ended Year ended
December 31, December 31,
------------ ------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(5,566) $(18,951) $(37,567)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 3,360 4,645 43,865
Loss on disposal of fixed assets.............. 137 67 74
Stock-based compensation...................... -- 22,762 8,875
Provision for doubtful accounts............... 310 216 1,137
Deferred income taxes......................... (124) (1,628) --
Changes in operating assets and liabilities:
Accounts receivable.......................... (4,051) (7,786) (17,651)
Accounts receivable, unbilled................ (4,992) (1,257) (10,371)
Other current assets......................... (1,105) 133 (494)
Other assets................................. (12) (1,836) (282)
Accounts payable............................. 7,451 (3,461) 5,503
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 1,582 3,441 7,244
Accrued expenses............................. 831 3,681 9,519
Accrued compensation......................... 3,715 8,138 4,563
Other liabilities............................ -- 48 --
------- -------- --------
Net cash provided by (used in) operating
activities................................. 1,536 8,212 14,415
------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets...................... (7,944) (6,329) (8,525)
Business acquired net of cash................. -- -- (65,200)
------- -------- --------
Net cash used in investing activities....... (7,944) (6,329) (73,725)
------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease
obligations.................................. (299) (611) (306)
Proceeds from sale leaseback transaction...... 1,807 -- --
Net proceeds from line of credit, bank........ 4,055 2,345 --
Proceeds from note payable, bank, net of debt
issuance costs............................... 5,000 5,000 70,558
Proceeds from (payment of) note payable,
tenant allowances............................ 105 (155) (158)
Proceeds from notes payable, shareholders..... 3,251 3,000 --
Payment of notes payable, bank................ (1,250) (8,750) (4,893)
Payment of notes payable, shareholders........ (4,532) (4,228) --
Interest receivable on shareholders' notes.... (162) -- --
Distributions to shareholders................. -- (315) (2,461)
Repurchase of stock options and warrants...... -- -- (4,433)
Proceeds from issuance of common stock........ -- -- 1,407
------- -------- --------
Net cash provided by (used in) financing
activities................................. 7,975 (3,714) 59,714
------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 1,567 (1,831) 404
Cash and cash equivalents, beginning of
period........................................ 301 1,868 37
------- -------- --------
Cash and cash equivalents, end of period....... $ 1,868 $ 37 $ 441
======= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for taxes........................... $ 21 $ 230 $ 1,011
Cash paid for interest........................ 1,692 2,034 6,781
Supplemental disclosures of noncash investing
and financing activities:
Equipment acquired under capital lease........ -- $ 594 $ 606
Assignment of notes receivable................ -- 1,065 --
Interest accrued on notes receivable
assignment................................... $ 2,241 272 --
Cancellation of note payable to shareholder... 2,187 -- --
Issuance of notes payable to shareholders..... 1,666 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
Basis of Presentation
Bronner Slosberg Humphrey Inc. was incorporated in Massachusetts in 1980 as
a Subchapter S corporation. Strategic Interactive Group, Inc. was incorporated
in Massachusetts in 1995 as a Subchapter S corporation. Through December 31,
1998, certain shareholders of Bronner Slosberg Humphrey Inc. ("BSH") owned a
majority of the outstanding shares of Strategic Interactive Group, Inc.
("SIG"). Accordingly, financial statements of the two entities are combined
for 1998 and prior years and are referred to herein as the "Predecessor".
On November 5, 1998, BSH and SIG completed transactions in which each
company was reorganized into a Massachusetts business trusts (each a "Trust")
with a wholly-owned limited liability company ("LLC"). After formation of the
Trusts and LLCs, the two companies were merged with and into Bronner Slosberg
Humphrey, LLC and Strategic Interactive Group, LLC, respectively, with each
shareholder of the original S corporations receiving as consideration an
equivalent number of beneficial common shares in the Trusts as the
shareholders held in the S corporations prior to the mergers. The
reorganization of the companies into Trusts and subsidiary LLCs has been
accounted for at historical cost as a combination of entities under common
control.
Effective January 1, 1999, the Predecessor completed a transaction with a
private equity investor and the existing shareholders (the
"Recapitalization"). Under the terms of the Recapitalization, the private
equity investor acquired a certain number of shares directly from the existing
shareholders for $102.0 million. In addition the Company borrowed $70.6
million from a bank. Of the borrowings; $32.7 million was used to repurchase
stock, stock options and stock rights; $27.4 million was used to repay
outstanding debt, accrued interest and other existing obligations of the
Company at the date of the Recapitalization; $5.1 million was used to pay
acquisition costs; and $5.4 million was used for general working capital
purposes. On the date following the close of the Recapitalization, SIG
effectively merged into Bronner Slosberg Humphrey Co. Bronner Slosberg
Humphrey Co. serves as the ultimate parent of Digitas, LLC, the Delaware
limited liability company through which the business is operated.
Substantially all of the stock options and stock appreciation rights of the
Predecessor were replaced with stock options in Bronner Slosberg Humphrey Co.
with equivalent in-the-money value which existed at the date of
Recapitalization. The Recapitalization was accounted for as a purchase as
described in Note 3. On December 22, 1999, Digitas Inc., a Delaware
corporation was formed to ultimately hold the ownership interests of Bronner
Slosberg Humphrey Co. and Digitas, LLC after completing a reorganization to
become the sole shareholder of the Trust. The "Company" refers to Digitas, LLC
prior to this reorganization and Digitas, thereafter. A United Kingdom
subsidiary was formed in late 1998 and is included in the financial statements
of the Predecessor and the Company subsequent to that date.
The financial statements of the Company and the Predecessor are not
comparable in certain respects due to the application of purchase accounting
as of the date of the recapitalization. The Predecessor's combined financial
statements represent the historical basis of financial position, results of
operations and cash flows for the periods presented. The financial information
of the Predecessor presented herein does not necessarily reflect what the
financial position and results of operations of the Company would have been
had it been recapitalized for all the periods and may not be indicative of
future operations or financial position.
The Predecessor and the Company have experienced substantial net losses for
the three years ended December 31, 1999. These losses have been attributable
to charges related to stock-based compensation and the amortization of
intangible assets.
The Company expects to continue to increase its operating expenses and
capital spending in order to facilitate its anticipated growth. As a result of
seasonal working capital requirements, the Company's plan
F-8
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
indicates that additional working capital financing would be required to
support its planned investments. In the event that an initial public offering
is not completed on a timely basis, the Company would seek to extend its
existing loan facilities by $10 million.
Operations
The Company is an Internet professional services firm that provides
integrated, Internet-based strategic, technological and marketing solutions to
Fortune 100 and other industry leading companies that have utilized the
Internet as a principal means of business transformation. The Company develops
large-scale, long-term, strategic relationships with a select group of
clients.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments
purchased with an original maturity of three months or less. Cash equivalents
are stated at cost plus accrued interest which approximates market.
Fixed Assets
Fixed assets are recorded at cost. Expenditures for renewals and
improvements are capitalized, and repairs and maintenance are charged to
operations as incurred. Equipment held under capital leases is stated at the
present value of minimum lease payments at the inception of the lease and
amortized using the straight-line method over the lease term. Leasehold
improvements are recorded net of construction allowances provided by the
landlord. Depreciation is recorded on the straight-line basis over the
estimated useful life of the related assets, which are as follows:
<TABLE>
<S> <C>
Furniture and fixtures................ 7 years
Computer equipment and software....... 3-5 years
Capital leases........................ Lesser of lease term or useful life
Leasehold improvements................ Lesser of lease term or useful life
Intangible Assets
Intangible assets consist of assembled workforce, favorable lease and
excess cost over fair value of net assets acquired ("goodwill") and are stated
at cost less accumulated amortization. Assembled workforce is the estimated
cost to replace the entire workforce in place at the purchase date, including
replacement costs consisting of costs to recruit, relocate and train a new
workforce. Favorable lease is the difference between the fair market value of
a new lease signed on the purchase date and the actual lease in existence.
Intangible assets are amortized on a straight-line basis over their estimated
future lives, which are as follows:
Assembled workforce................... 2 years
Favorable lease....................... 6 years
Goodwill.............................. 7 years
</TABLE>
Capitalized Financing Fees
Capitalized financing fees are amortized over the term of the underlying
debt utilizing the effective interest rate method, and the amortization is
included in interest expense.
F-9
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Internal Use Software
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," was adopted, effective January 1, 1999. The
company capitalizes external costs related to software and implementation
services in connection with its internal use software systems.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, short-
term debt and accounts payable approximate their carrying value due to the
immediate or short-term maturity of these financial instruments. The fair
value of long-term debt is based on the current rates offered to the company
for debt instruments of similar risks and maturities and approximates its
carrying value.
Revenue Recognition
Revenue pursuant to fixed-price contracts is recognized as services are
rendered on the percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenue pursuant to time
and materials contracts are recognized as services are provided. Certain
contracts contain provisions for performance incentives. Such contingent
revenue is recognized in the period in which the contingency is resolved.
Unbilled accounts receivable on contracts is comprised of costs incurred plus
estimated earnings from revenue earned in advance of billings under the
contract. Advance payments are recorded as billings in excess of cost and
earnings on uncompleted contracts until the services are provided. Included in
accounts receivable and unbilled accounts receivable are reimbursable costs
which have been incurred on behalf of the Company's clients. In accordance
with the client agreements, there is no markup on reimbursable costs and the
client's approval is required prior to the Company incurring them. Revenue
does not include reimburseable costs.
Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which losses
are determined.
Professional Services Costs
Professional services costs consist primarily of compensation and benefits
of the Company's employees engaged in the delivery of professional services
plus other nonreimbursable service costs.
Research and Development Costs
Research and development costs are charged to operations as incurred. To
date, substantially all research and development activities have been pursuant
to customer contracts and have been expensed as professional services costs.
Net Income Per Share
Basic and diluted earnings per share are computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings
per Share". SFAS No. 128 requires both basic earnings per share, which is
based on the weighted average number of common shares outstanding, and diluted
earnings per
F-10
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
share, which is based on the weighted average number of common shares
outstanding and all dilutive potential common equivalent shares outstanding.
The dilutive effect of options is determined under the treasury stock method
using the average market price for the period. Common equivalent shares are
included in the per share calculations where the effect of their inclusion
would be dilutive.
Before the Recapitalization, the two predecessor companies were S
corporations and thus were not subject to federal income taxation. In
addition, because the two companies had different numbers of common shares
outstanding that bear no relationship to the current number of common shares
outstanding, net income (loss) per share has not been presented for periods
before 1999.
The following table reconciles the weighted average common shares
outstanding to the shares used in computation of diluted weighted average
common shares outstanding at December 31, 1999:
<TABLE>
<S> <C>
Weighted average common shares outstanding.......................... 50,703,479
Dilutive effect of options and using the treasury stock method...... --
----------
Diluted weighted average common shares outstanding.................. 50,703,479
</TABLE>
As of December 31, 1999, 29,208,972 options and warrants were outstanding,
but not included in the above calculation as their effect would have been
antidilutive as the Company was in a loss position.
Income Taxes
The Predecessor was taxed under the provisions of Subchapter S of the
Internal Revenue Code, whereby the corporate income is taxed to the individual
shareholders based on their proportionate share of the Company's taxable
income. Massachusetts taxes profits on S corporations with receipts exceeding
$6,000,000.
On November 5, 1998, the Predecessor reorganized resulting in its
conversion into a Massachusetts business trust, a reorganization which affects
the Massachusetts tax treatment of the Predecessor and the Company and its
shareholders that are residents of Massachusetts. The Predecessor and the
Company recorded a provision for Massachusetts taxes that reflects its change
in status during 1998.
Effective January 1, 1999, the Predecessor terminated its S corporation
election and is subject to corporate-level federal and certain additional
state income taxes.
The Company accounts for income taxes using the asset and liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes". Under SFAS No.
109, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
income tax bases for operating profit and tax liability carryforward. Deferred
tax assets and liabilities are measured using enacted tax rates for the years
in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets or liabilities of a change in tax rates is
recognized in the period in which the tax change occurs.
Stock-based Compensation
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations are applied in accounting for
its employee stock option plans. The disclosure option of FASB No. 123,
"Accounting for Stock-Based Compensation", which includes information with
respect to stock-based compensation determined under the "fair value" method
has been utilized in the accompanying financial statements.
F-11
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the U.S.
dollar. Monetary assets and liabilities of the subsidiary are translated into
U.S. dollars at the exchange rate in effect at period-end and nonmonetary
assets and liabilities are remeasured at historic exchange rates. Income and
expenses are remeasured at the average exchange rate for the period.
Translation gains and losses are reflected in SG&A in the statement of
operations. There were no translation gains or losses for the year ended
December 31, 1998. Translation losses were approximately $158,000 for the year
ended December 31, 1999.
Management's Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
Comprehensive Income
Effective January 1, 1998, SFAS No. 130, "Reporting Comprehensive Income",
was adopted. This statement requires that all components of comprehensive
income be reported in the financial statements in the period in which they are
recognized. For each year reported, comprehensive income (loss) under SFAS No.
130 was equivalent to the Company's net income (loss) reported in the
accompanying statement of operations.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company will adopt SFAS No. 133 as required by
SFAS No. 137, "Deferral of the Effective Date of the FASB Statement No. 133",
in fiscal year 2001. The Company has not yet determined the impact that the
adoption of SFAS No. 133 will have on its financial position or results of
operations.
3. Recapitalization
The Recapitalization described in Note 1 has been accounted for under the
purchase method. Accordingly, the purchase price has been allocated to
tangible and intangible assets acquired and liabilities assumed based on their
respective fair values on the acquisition date based on an independent
appraisal.
Consideration and acquisition costs:
<TABLE>
<S> <C>
Cash paid for stock, options and stock rights................... $134,739
Fair value of stock and options exchanged ...................... 51,742
Acquisition costs............................................... 5,104
--------
$191,585
========
</TABLE>
Allocation of purchase price:
<TABLE>
<S> <C>
Goodwill........................................................ $171,726
Workforce-in-place.............................................. 22,900
Favorable lease................................................. 4,234
Net liabilities acquired........................................ (7,275)
--------
$191,585
========
</TABLE>
F-12
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma results of operations reflects the
combined results of operations of the Predecessor for the year ended
December 31, 1998 as if the purchase had occurred on the first day of the
period presented. The unaudited pro forma information is not necessarily
indicative of the combined results that would have occurred had the
purchase taken place on the first day of the period presented, nor is it
necessarily indicative of results that may occur in the future.
<TABLE>
<CAPTION>
Year ended
December 31,
------------
1998
------------
<S> <C>
Revenue...................................................... $122,309
Net loss..................................................... (44,845)
</TABLE>
4. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Predecessor
(combined) Company
------------ ------------
December 31, December 31,
------------ ------------
1998 1999
------------ ------------
<S> <C> <C>
Furniture and fixtures............................................................................... $ 7,401 $ 10,416
Computer equipment and software...................................................................... 16,499 22,025
Leasehold improvements............................................................................... 4,285 5,696
Capital leases....................................................................................... 3,236 1,449
------- --------
31,421 39,586
------- --------
Less accumulated depreciation........................................................................ (13,446) (19,349)
------- --------
$17,975 $ 20,237
======= ========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was approximately $3,360,000, $4,645,000, and $6,795,000, respectively.
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Company
------------
December 31,
1999
------------
<S> <C>
Assembled workforce.......................................... $ 22,900
Favorable lease.............................................. 4,234
Goodwill..................................................... 171,726
--------
198,860
Less accumulated amortization................................ (36,688)
--------
$162,172
========
</TABLE>
There were no intangible assets as of December 31, 1997 and 1998.
F-13
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
Predecessor
(combined) Company
------------ ------------
December 31, December 31,
------------ ------------
1998 1999
------------ ------------
<S> <C> <C>
Line of credit........................................ $ 7,000 $ --
Notes payable, term loan.............................. -- 68,505
Notes payable, tenant allowance....................... 1,604 1,447
Notes payable, shareholders........................... 12,003 --
------- -------
20,607 69,952
Less: current portion................................. (19,175) (7,530)
------- -------
Total long-term debt................................ $ 1,432 $62,422
======= =======
</TABLE>
Credit Agreements
During 1998, the Predecessor entered into various amendments to the Credit
Agreement which increased the line of credit to $15,000,000 and extended the
expiration date from May 31, 1998 to November 30, 1998. A new term loan of
$5,000,000 ("Bridge Loan") was entered into on March 13, 1998 and expired on
September 30, 1998. Principal and interest on the term and bridge loans were
payable at LIBOR plus .25% to .75% or the prime rate plus 0% to .25% based on
quarterly leverage ratios.
On November 25, 1998, the Predecessor entered into a Credit Agreement (the
"New Agreement") which replaced the existing Credit Agreement and all other
previous lending agreements. The New Agreement included a revolving line of
credit and a $10,000,000 standby letter of credit facility. Under the line of
credit terms, the maximum line was equal to $35,000,000 less outstanding
standby letters of credit and expired on October 31, 2001. At December 31,
1998, $7,000,000 was outstanding under the line of credit and approximately
$6,194,000 was outstanding under standby letters of credit. The interest rate
on the line of credit was either the bank's prime rate or the LIBOR rate, at
the Predecessor's discretion, plus the applicable margin of 0% to .25% on
prime loans and .5% to 1.5% on LIBOR loans based on certain ratios as set by
the bank. The rate at December 31, 1998 was 7.75%. The standby letter of
credit facility expired on October 31, 2001, subject to renewal, which was at
the discretion of the bank, and had an annual commitment fee that ranged from
.20% to .25%. The New Agreement was collateralized by the combined assets of
Predecessor company and contained certain restrictive covenants. The covenants
limited shareholder distributions and payments on subordinated debt to certain
maintainable ratios for cash and also included minimum leverage and debt
service ratios. As part of the New Agreement, the Bridge Loan and the Credit
Agreement were paid in full.
On December 31, 1999, the Company's long term credit agreement consisted of
the following:
. $68,505,000 outstanding under a $73,399,000 term loan due December 31,
2004
. a $25,000,000 revolving credit facility expiring on December 31, 2004 of
which up to $15,000,000 may be used to support standby letters of credit.
Amounts borrowed under the term loan and the revolving credit facility bear
interest, at the Company's option, at either: i) the Base Rate (as defined in
the credit agreement) plus a margin of 0.5% to 2.0%, or ii) LIBOR plus a
margin of 1.5% to 3.0%. At December 31, 1999, the applicable borrowing rate
for the term loan was 8.5% and the borrowing rate for the revolving credit was
9.8%. Additionally, the Company is required to
F-14
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
pay a commitment fee of 0.5% of the average daily unused amount of the
revolving credit. At December 31, 1999, the Company had no cash borrowings
under the revolving credit and $10,289,000 outstanding standby letters of
credit, leaving $14,711,000 available for future borrowings.
The Company is required to maintain, for at least 2 years after the Closing
Date, an interest rate protection vehicle which would establish a maximum
interest rate of not more than 10% per annum and would have a notional
principal amount of not less than 50% of the total term debt of $73,399,000.
The term loan is repayable as follows (in thousands):
<TABLE>
<S> <C>
2000.............................................................. $ 7,341
2001.............................................................. 10,276
2002.............................................................. 13,213
2003.............................................................. 16,143
2004.............................................................. 21,532
-------
$68,505
=======
</TABLE>
The above table does not include future payments on the notes payable,
tenant allowances that are included in long-term debt in the accompanying
balance sheet and discussed below.
The credit facilities contain certain change of control provisions and
impose certain restrictive covenants upon the Company related to the
incurrence of indebtedness, contingent obligations, transactions with
affiliates, business combinations, investments, asset sales and payments of
dividends. Certain financial covenants, including interest coverage and
leverage ratios, maximum capital expenditures and minimum EBITDA levels
(effective through Q1 of 2001) are also imposed on the Company. Additionally,
the Company is required to reduce the outstanding aggregate principal balance
of the revolving credit facility such that the balance does not exceed
$8,000,000 for 30 consecutive days during each consecutive 12 month period. As
of December 31, 1999, the Company was in compliance with the credit facility.
Notes Payable, Tenant Allowances
Since 1995, the Predecessor has received tenant allowances, which are
required to be reimbursed to the landlord through 2005. Interest expense
recognized in relation to these notes amounted to $179,000, $169,000, and
$153,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Notes Payable, Shareholders
Notes payable, shareholders, include demand notes of approximately
$10,656,000 at December 31, 1998. These notes accrued interest monthly at a
range of 8% to 8.25% per annum. Notes payable, shareholders, also include
notes payable to certain shareholders, for the repurchase of stock that are
payable in quarterly installments. All notes payable, shareholders were paid
in connection with the recapitalization described in Note 3.
For the years ended December 31, 1997 and 1998, interest expense on notes
payable, shareholders was approximately $1,216,000 and $1,114,000,
respectively. Accrued interest related to these notes was approximately
$1,786,000 and $2,471,000 at December 31, 1997 and 1998, respectively.
F-15
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Shareholder's Equity
Common Stock
Under the Declaration of Trust of each of Bronner Slosberg Humphrey Co. and
Strategic Interactive Group Co., an unlimited amount of common shares were
authorized for no par value. All holders of common shares are entitled to one
vote per share and all dividends on common shares shall be distributed pro
rata, when and if declared by the board of directors.
Stock Split
On April 1, 1997, the Board of Directors approved a 6,911.02-for-1 stock
split of BSH common stock and amended the articles of incorporation to
increase the number of authorized shares from 12,500 to 1,000,000 shares of
common stock.
On December 2, 1999, the Board of Directors approved a 30-for-1 stock split
of the Company's common stock. Share amounts have been restated to reflect the
split.
On February 10, 2000, the Board of Directors approved a 2-for-1 stock split
of the Company's common stock. All share and per share amounts have been
restated to reflect the split.
Shareholder Transactions
In 1996, BSH entered into a Stock Redemption Agreement (the "1996
Agreement"). Under the terms of the 1996 Agreement, a shareholder sold back to
BSH 3,619,992 shares of common stock that were purchased in 1991. In
consideration for the stock redemption, BSH forgave a note receivable of
$1,065,000 and issued a note payable to the shareholder in the amount of
$2,187,000. In 1997, BSH restated the 1996 Agreement and canceled the related
note payable. Under the restated agreement, BSH reissued 1,339,356 shares of
common stock and a related note payable for $940,000 which accrues interest at
8.25% payable in quarterly installments.
During 1996, under various stock purchase and stock option agreements,
three officers of BSH purchased shares of common stock. As part of this
transaction, BSH issued notes receivable from shareholders of $2,239,000 due
on March 31, 2009, which accrued interest at the prime rate. During 1997,
notes receivable in the amount of $2,063,000 with two former shareholders were
canceled in connection with an exchange agreement whereby the shareholders
gave up their shares of stock in exchange for SAR units under the SAR Plan
(see Note 8).
In 1997, BSH entered into a stock redemption agreement with a shareholder.
Under this agreement, BSH repurchased 970,308 shares of BSH common stock and
40,000 shares of SIG common stock for the cancellation of the remaining note
receivable balance of $176,000 issued in 1996 and the issuance of a note
payable for $726,000 due by December 31, 1998, which accrued interest at
8.25%.
On January 1, 1998, in connection with a sale of BSH shares between two
shareholders, a $1,065,000 note receivable from one of the shareholders to BSH
issued in 1996 was assumed by another shareholder. All previously owed amounts
from BSH to the selling shareholder for previous loans made by the selling
shareholder to BSH and an obligation to pay a 1995 year-end compensation
payment were discharged due to BSH's issuance of a note payable to the selling
shareholder in the amount of $1,764,000.
On December 29, 1998, BSH declared and paid a cash dividend of $.00643095
per share on its outstanding common shares for a total distribution to
shareholders of $315,000.
F-16
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Stock-based Compensation
Stock Appreciation Rights
The Predecessor established a 1997 Stock Appreciation Right Plan (the "BSH
SAR Plan") which became effective on April 1, 1997 and a 1997 Stock
Appreciation Right Plan (the "SIG Plan" and, with the BSH Plan, the "SAR
Plans") which became effective August 1, 1997. Under the SAR Plans, certain
key employees are granted stock appreciation right units (each a "BSH SAR" or
a "SIG SAR" and collectively the "SARs") which vest in accordance with a
vesting schedule indicated on each SAR agreement. Participants are eligible
for an annual distribution for each SAR unit vested at the end of each year
based on the Predecessor's operating income after charges and reserves have
been deducted as determined by the Board. Additionally, the entities are
obligated to pay each participant the appreciation on the SARs upon the
occurrence of a triggering event, as defined in the SAR Plans. Account
appreciation, as defined by the SAR Plans, is the difference between the fair
market value of each SAR less the base value.
BSH issued 11,970,000 and 2,040,000 SAR units in 1997 and 1998,
respectively. SIG issued 10,200 SAR units in 1997 and 2,040 in 1998.
Compensation expense of $3,429,000 was recorded for the year ended December
31, 1997 related to the SAR annual distribution. Effective January 1, 1999,
there was a triggering event. In connection with the triggering event,
6,570,000 of the 6,765,000 BSH SARs outstanding at that time were converted on
a one-for-one basis into options to purchase shares of beneficial interest in
Bronner Slosberg Humphrey Co. ("Trust Options"). In addition, the remaining
195,000 BSH SARs outstanding at that time were redeemed for cash. For the SIG
SARs, each of the 5,100 SIG SARs outstanding at the time of the triggering
event were converted on a one-for-one basis effective January 1, 1999 into
options to purchase shares of beneficial interest in Strategic Interactive
Group Co. These same options were then converted effective January 1, 2000 on
an approximately 29-for-1 basis into 148,060.80 Trust Options. In 1998, the
Predecessor did not award a SAR annual distribution due to the triggering
event, but issued bonuses in lieu of the SAR annual distribution in the
amounts of $3,058,000 for the year ended December 31, 1998. Predecessor
recorded compensation expense of $20,130,000 for SAR appreciation for the year
ended December 31, 1998.
Stock Option Plans
BSH established an informal Employee Stock Option Plan (the "Stock Option
Plan") in 1989. Under the Stock Option Plan, grants could be made to selected
officers and employees at fair market value on date of grant. Options became
exercisable as to 25% of the grants, on an initial date as defined in the
employee stock option agreements, and up to an additional 25% each year
thereafter. The BSH Stock Option Plan was terminated in connection with the
recapitalization in January 1999.
The following table summarizes stock option activity under the Stock Option
Plan:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 December 31, 1999
-------------------- -------------------- -------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period ............. 2,073,302 $0.085 1,658,644 $0.09 829,322 $0.09
Options granted......... -- -- -- -- -- --
Options rolled into 1998
Plan................... -- -- -- -- (829,322) 0.09
Options exercised ...... -- -- -- -- -- --
Options canceled........ (414,658) 0.07 (829,322) 0.09 -- --
--------- ------ --------- ----- -------- -----
Outstanding at end of
period ................ 1,658,644 $ 0.09 829,322 $0.09 -- --
</TABLE>
SIG established an Employee Stock Option Plan (the "1995 Plan") in 1995.
Under the 1995 Plan, grants could be made to selected officers. The 1995 Plan
authorizes the granting of stock options for up to an aggregate
F-17
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
of 240,000 shares of common stock and expires 10 years from the date of the
grant. Options became exercisable as to 33% of the grant on April 1, 1996 and
an additional 33% each year thereafter.
The following table summarizes stock option activity under the 1995 Plan:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 December 31, 1999
--------------------- ------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period ............. 3,519,516 $0.0017 3,058,568 $1.65 3,058,568 $1.65
Options granted ........ 3,058,568 1.65 -- -- -- --
Options rolled into 1998
Plan................... -- -- -- -- (3,030,524) 1.65
Options exercised ...... (235,572) 0.0017 -- -- -- --
Options canceled ....... (3,283,944) 0.0017 -- -- (28,044) 1.65
---------- ------- --------- ----- ---------- -----
Outstanding at end of
period ................ 3,058,568 $ 1.65 3,058,568 $1.65 -- --
Weighted-average grant
date fair value of
options granted during
the year at fair market
value................... $ 35.44 -- --
</TABLE>
In 1997, SIG terminated the 1995 Plan. In exchange for all unexercised
outstanding options, all option holders entered into an exchange agreement,
whereby they received exchange compensation, deferred compensation and
3,058,568 stock options. The 3,058,568 stock options were exercisable upon
SIG's engagement of underwriters in connection with a proposed public offering
provided the offering were to occur before May 15, 2000 or upon consummation
of a change in control provided the change in control would be effective
before May 15, 2000. In 1998, it became probable that a change in control
would be effective with the January 1, 1999 Recapitalization therefore the
Predecessor recorded compensation expense of $2,632,000 based on the
difference between the fair market value and the exercise price of the
outstanding options.
In contemplation of the Recapitalization in 1999, the board of directors of
BSH adopted the 1998 option plan (the "1998 Plan"). The 1998 Plan authorized
the grant of (i) 17,126,644.8 rollover options in exchange for the
cancellation of stock appreciation rights and stock options held by the SAR
and option holders prior to the recapitalization and (ii) an additional
11,744,700 options that are not rollover options. In September 1999, the board
of directors amended the plan to decrease the number of non-rollover options
that could be granted under the plan to 10,152,000 shares.
All options granted under the 1998 Plan were non-qualified stock options.
Grants under the plan may be made to employees and non-employee directors,
consultants and independent contractors.
A committee of the board of directors administers the plan which includes
determining the participants in the plan and the number of shares of common
stock to be covered by each option, amending the terms of any option, subject
to certain limitations, and interpreting the terms of the plan.
Each rollover option is immediately exercisable as of the date of grant and
has an exercise price equal to the base value of the stock appreciation rights
or the exercise price of the stock options, as applicable, from which the
options were converted. All other options granted under the plan are generally
subject to a five-year vesting schedule pursuant to which the options vest in
equal annual installments on the third, fourth and fifth anniversaries of the
grant date. In addition, all options other than rollover options must have a
per share exercise price equal to or greater than the fair market value of a
share of the Company's common stock as of the grant date, as determined by the
board of directors or a committee of such board. All options granted under the
plan terminate on the tenth anniversary of the grant date. Vested options may
be exercised for specified periods after the termination of the optionee's
employment or other service relationship with us or our affiliates.
F-18
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 1999, the board of directors adopted the 1999 option plan (the
"1999 Plan") which allows for the grant of up to 13,592,700 shares of common
stock.
Grants under the plan may be made to employees and non-employee directors,
consultants and independent contractors who contribute to the management,
growth and profitability of the Company's business or its affiliates.
A committee of the board of directors administers the plan which includes
determining the participants in the plan and the number of shares of common
stock to be covered by each option, amending the terms of any option, subject
to certain limitations, and interpreting the terms of the plan.
Non-qualified stock options granted under the plan may be granted at prices
which are less than the fair market value of the underlying shares on the date
granted. Under the plan, incentive stock options and non-qualified stock
options are generally subject to a four-year vesting schedule pursuant to
which the options vest 25% on the first anniversary of the grant date and an
additional 6.25% on each consecutive three-month period thereafter. The
options generally terminate on the tenth anniversary of the grant date. In
addition, vested options may be exercised for specified periods after the
termination of the optionee's employment or other service relationship with
the Company or its affiliates.
In December 1999, the Board of Directors authorized the Company to purchase
300,000 options to purchase shares of the Company's common stock held by an
employee. The purchase price for the options was $8.75 per share, less the
exercise price of $1.01 per share, an aggregate of $2.3 million. These options
were issued in connection with the Recapitalization and approximately $500,000
of the $2.3 million is included in the purchase price of the Company.
Accordingly, the Company has recorded a compensation charge of $1.8 million
for this transaction in the accompanying statement of operations for the year
ended December 31, 1999 and the balance of $500,000 has been recorded as a
reduction to paid in capital, as of December 31, 1999.
In December 1999, the Board of Directors authorized the Company to
repurchase 180,000 options to purchase shares of the Company's common stock
held by a non-employee shareholder. The purchase price for the options was
$8.75 per share, less the exercise price of $1.18 per share. The consideration
paid for these options was $1.4 million which has been recorded as a reduction
to paid in capital as of December 31, 1999.
The following summarizes stock option activity under the 1998 and 1999
Plans:
<TABLE>
<CAPTION>
Options Weighted
available average
for grant exercise
shares price
---------- --------
<S> <C> <C>
Options exchanged in connection with recapitalization
..................................................... 22,946,644 $1.55
Options granted....................................... 8,780,000 5.25
Options exercised..................................... (118,448) 1.27
Options canceled...................................... (3,299,224) 1.86
---------- -----
Outstanding at December 31, 1999...................... 28,308,972 $2.66
Weighted average fair value of options granted during
the year at fair market value ....................... $6.52
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- ---------------------
Weighted
average Number
Number remaining Weighted exercisable Weighted
Range of outstanding at contractual average at average
exercise December 31, life (in exercise December 31, exercise
price 1999 years) price 1999 price
-------- -------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.94-1.65 14,818,972 9.0 $1.18 14,818,972 $1.18
$2.52 9,642,000 9.2 2.52 780,000 2.52
$8.75 3,848,000 9.9 8.75 -- --
---------- --- ----- ---------- -----
$0.94-8.75 28,308,972 9.2 $2.66 15,598,972 $1.24
========== === ===== ========== =====
</TABLE>
F-19
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition to the Recapitalization, during 1999 the Company issued
8,360,000 stock options to employees at exercise prices ranging from $2.52 to
$8.75, which at the time of the grant, was below fair market value of the
Company's common stock. As a result of these option grants, we have estimated
cumulative compensation expense of $55.6 million which represents the
aggregate difference between the option exercise price and the deemed fair
market value of the common stock determined for financial reporting purposes
for grants to employees. The amount will be recognized as compensation expense
over the vesting period of the underlying stock options. The Company recorded
compensation expense of $5.8 million during the year ended December 31, 1999,
related to these options.
Had compensation cost for the 1998 and 1999 plans (excluding exchanged
shares) been determined based on the fair value at the grant dates as
calculated in accordance with SFAS No. 123, the Company's net loss for the
year ended December 31, 1999 would have been as follows:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Net loss:
As reported.................................................. $(37,567)
Pro forma.................................................... $(41,491)
Net loss per share:
As reported................................................. $ (0.74)
Pro forma................................................... $ (0.82)
</TABLE>
There were no compensation costs for the years ended December 31, 1997 and
1998 related to the Stock Option Plans.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used: volatility of 55% no expected dividend yield, risk
free interest rates of 4.60%-6.19% and expected life of five years.
During 1999 the Company issued 498,544 shares of common stock to certain
current and former members of the Board of Directors for an aggregate purchase
price of $1.3 million. The Company has recorded a compensation charge of $3.0
million which represents the aggregate difference between the stock price and
the deemed fair market value of the common stock determined for financial
reporting purposes.
Common Stock Warrants
In connection with the recapitalization, the Company issued warrants to
purchase 900,000 shares at an exercise price per share of $2.52. The Company
issued the warrants to the buyer and the value ascribed to the warrants was
included in the recapitalization which was accounted for as a purchase.
In December 1999, the Board of Directors authorized the Company to
repurchase warrants to purchase 120,000 shares of the Company's common stock
with an exercise price of $2.52 per share held by a non-employee shareholder.
The purchase price for the warrants was $8.75 per share less the respective
exercise price. The aggregate consideration paid for these warrants was
$700,000 which has been recorded as a reduction to paid in capital as of
December 31, 1999.
F-20
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The components of loss before income taxes and the benefit from (provision
for) income taxes are as follows:
<TABLE>
<CAPTION>
Predecessor
(combined) Company
----------------- ------------
December 31, December 31,
----------------- ------------
1997 1998 1999
------- -------- ------------
<S> <C> <C> <C>
Loss before income taxes...................... $(5,680) $(20,390) $(37,000)
Benefit from (provision for) income taxes
Current
Federal................................... -- -- 311
State and local........................... (10) (189) (567)
Deferred
Federal................................... -- -- 11,016
State and local........................... 232 1,368 349
(Increase) decrease in valuation allowance.... (108) 260 (11,676)
------- -------- --------
Benefit from (provision for) income taxes..... $ 114 $ 1,439 $ (567)
======= ======== ========
</TABLE>
The reconciliation of the difference between the United States statutory
rate to the effective rate is as follows:
<TABLE>
<CAPTION>
Predecessor
(combined) Company
------------- ------------
December
31, December 31,
------------- ------------
1997 1998 1999
----- ----- ------------
<S> <C> <C> <C>
United States statutory rate....................... 0% 0% 35.0%
State taxes, net of federal benefit................ 4 6 (0.5)
Goodwill and other permanent differences........... -- -- (3.6)
Change in valuation allowance...................... (2) 1 (32.5)
----- ----- -----
Effective tax rate................................. 2% 7% (1.6) %
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
December
31, December 31,
------------ ------------
1997 1998 1999
---- ------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Amortization of intangibles.......................... $-- $ -- $ 8,645
Accrued expenses..................................... 265 1,906 862
Net operating loss carryforward...................... 260 -- 311
Stock-based compensation............................. -- -- 1,867
Allowance for doubtful accounts...................... 32 46 168
---- ------ --------
Total tax deferred assets............................ 557 1,952 11,853
---- ------ --------
Basis difference of property and equipment............ 112 139 177
---- ------ --------
Valuation allowance.................................. (260) -- $(11,676)
---- ------ ========
Total............................................... $185 $1,813 --
==== ====== ========
</TABLE>
F-21
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has incurred losses for the three years ended December 31,
1999. Management believes that, based on the history of such losses and other
factors, the weight of available evidence indicates that it is more likely
than not that the Company will not be able to realize its deferred tax assets
and thus a full valuation reserve has been recorded at December 31, 1999 for
these costs.
10. Employee Profit Sharing Plan
In 1996, an Employee Profit Sharing Plan (the "Profit Sharing Plan") was
established which pays certain employees a percentage of their earnings
dependent on financial results as determined by the Board of Directors. The
cost of the Profit Sharing Plan was approximately $1,828,000, $2,132,000 and
$2,306,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
The Profit Sharing Plan was terminated effective December 31, 1999, with final
payments made before March 15, 2000. To replace this benefit program, the
Company adopted a stock option and incentive plan (see Note 11.)
11. Employee Savings Plan
For the years ended December 31, 1997, 1998 and 1999, the Predecessor and
the Company had a noncontributory Employee Savings Plan (the "Plan"), which
was administered in accordance with the provisions of Section 401(k) of the
Internal Revenue Code. The Plan was a voluntary program in which employees who
met certain requirements elected to reduce their annual salary by up to 18%
and have this amount contributed to the Plan on their behalf. Effective
December 1999, the board of directors and shareholders adopted the 2000 stock
option and incentive plan (the "2000 Plan"). This new plan provides for a
Company match of employee contributions, up to 4%, subject to certain IRS
restrictions. In addition, under the 2000 Plan, employees will be eligible to
purchase common shares at a discount through periodic payroll deductions.
12. Other Related Party Transactions
A law firm, with a partner who was a member of the Predecessor's Board of
Directors during all of 1997 and a portion of 1998, provided legal services to
the Predecessor. Fees paid or accrued to the firm approximated $663,000 and
$216,000 for the years ended December 31, 1997 and 1998 respectively. No fees
were paid or accrued to the firm in 1999 (see Note 8.)
A shareholder/director is the chairman and founder of an internet company,
a former client. During the year ended December 31, 1999, we provided
approximately $85,000 in services under normal business terms to this company.
13. Financial Instruments and Risk Management
Interest Rate Risk Management
Per the terms of the Credit Agreement (see Note 6), the Company utilizes
interest rate swap agreements to fix interest rates on certain portions of the
variable rate term loan and to mitigate the effect of changes in interest
rates on earnings. The Company entered into separate agreements (the
"Agreements") on February 22 and 24, 1999, each for a notional amount of $20
million and each having a maturity date of February 2001. Under the
Agreements, the Company locked in fixed rates of 5.36% and 5.30%,
respectively, on the notional amounts and the Company compensates the
financial institution or is compensated by the financial institution for the
differential between the fixed rates and the current LIBOR rate. The interest
rate differential payable or accruable on the agreements is recognized on an
accrual basis as an adjustment to interest expense. At December 31, 1999
F-22
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
the fair values of the interest rate swaps, which represent the amounts the
Company would receive or pay to terminate the respective agreements, are net
receivables of $240,000 and $273,000, respectively, based on dealer quotes.
The variable rates at December 31, 1999 were 6.5% and 6.1%.
The market risk exposure from the interest rate swap is assessed in light
of the underlying interest rate exposures. Credit risk is minimized as the
agreement is with a major financial institution. The Company monitors the
credit worthiness of this financial institution and full performance is
anticipated.
14. Segment Information
Bronner, Slosberg & Humphrey Inc. and Strategic Interactive Group, Inc.,
were two separate businesses under common control until the Recapitalization
effective January 1, 1999. For purposes of these financial statements only BSH
and SIG have been combined for all periods prior to 1999 and have been titled
as Predecessor. Effective January 1, 1999, BSH and SIG have been integrated
into one operating Company, Digitas ("the Company"). The Company's chief
decision-maker, as defined under SFAS No. 131, is the Chief Executive Officer.
Since the integration, the Company manages its business as one segment. As a
result, the financial information disclosed in these financial statements
represents all of the material financial information related to the Company's
single operating segment.
The Company attempts to limit its concentration of credit risk by securing
well-known clients. While the Company often enters into written agreements
with its clients, such contracts are typically terminable between 30 and 90
days notice. Management believes a loss of significant clients could have a
material adverse effect on the Company's business, financial condition and
results of operations. The table below summarizes customers that individually
comprise greater than 10% of the company's revenue.
<TABLE>
<CAPTION>
A B C
--- --- ---
<S> <C> <C> <C>
1997......................................................... 43% * *
1998......................................................... 23% 24% 17%
1999......................................................... 17% 22% 23%
</TABLE>
* Less than 10% in year presented
15. Commitments
Capitalized Leases
During 1997, the Predecessor entered into an agreement for the sale and
leaseback of certain furniture and fixtures. The Predecessor had a purchase
option at the end of four years equal to remaining amounts due under the lease
plus $1.00. The lease is classified as a capital lease. The book value of the
assets was approximately $1,613,000. The gain realized on the transaction
totaling approximately $194,000 has been deferred and is being amortized over
the life of the assets. Assets under the capital lease were capitalized at
approximately $1,807,000 with an interest rate of 11.1% and are amortized over
the remaining life of the assets which is 5.5 years on average. The
Predecessor paid all amounts outstanding on this lease agreement on January 6,
1999. Additionally, the Company has certain noncancelable leases to finance
telephone and copier equipment.
The total capitalized cost of the assets subject to capital leases was
approximately $3,236,000 and $1,449,000 with accumulated amortization of
approximately $1,344,000 and $590,000 as of December 31, 1998 and 1999,
respectively.
F-23
<PAGE>
DIGITAS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Other Lease Obligations
Office facilities and certain office equipment are leased by the Company
under cancelable and noncancelable operating lease agreements expiring at
various dates through 2011.
The Company leases office space under noncancelable operating leases.
Rental expense, including amounts described above, consisting of minimum lease
payments under noncancelable operating leases amounted to approximately
$6,013,000, $6,819,000, and $8,591,000 for the years ended December 31, 1997,
1998 and 1999, respectively. The Company subleases a portion of its space to
another tenant. The Company's minimum payments were partially offset by tenant
income of $144,000, $228,000, and $286,000 for the years ended December 31,
1997, 1998 and 1999, respectively. Total minimum future tenant income under
these subleases as of December 31, 1999 are approximately $119,000 through May
2000. The future minimum rental payments, under capital and operating leases,
as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
2000.................................................... $408 $ 11,446
2001.................................................... 237 14,779
2002.................................................... 199 14,762
2003.................................................... 47 14,486
2004.................................................... -- 14,589
Thereafter.............................................. -- 52,103
---- --------
Total minimum rental payments required.................. 891 $122,165
========
Less amount representing interest....................... (37)
----
Present value of net minimum lease payments............. 854
Less current maturities................................. (398)
----
Long-term obligations, capital lease.................... $456
====
</TABLE>
F-24
<PAGE>
[DIGITAS LOGO APPEARS HERE]
